MASTER 
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NO.  94-82251 


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Author: 


National  City  Company 


Title: 

Digest  of  the  Federal 

Revenue  Act  of  1921 

Place: 

New  York 

Date: 

[1921] 


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National  city  bank  of  Hew  York. 

Digest  of  the  federal  Revenue  act  of  1921  for 
incone  and  excess  profits  taxes  for  1921,  1922 
and  subsequent  years,  with  tables  for  calcula- 
tion of  tax  and  for  comparison  of  taxes... 
Kew  Yorl:  j-Cig^i^ 

99  p.   tables.   1977  cm. 

Act  passed  November  23,  1921 i  effective  for 
income  tax  January  1,  1921. 


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Digest 


OF  THE 


Federal  Revenue  Act 

OF  1921 


THE  NATIONAL  QTY  BANK 

OF  NEW  YORK 


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LIBRARY 


School  of  Business 


DIGEST 


OF  THE 


FEDERAL  REVENUE  ACT 

OF  1921 


For  Income  and  Excess  Pkofits  Taxes 

FOR   1921,    1922   A\D   SUCSEQLENT  YeARS 

With  Taeles  jor  Calculation  of  Tax 
AND  FOR  Comparison  of  Taxes 


Act  Passed  November  23,  1921, 
Effective  for  Income  Tax  January  i,  1921, 


THE  NATIONAL  CITY  BANK 

OF  NEW  YORK 
55  WALL   STREET,   NEW   YORK 


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Copyright,  1921, 
The  National  City  Company 


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FOREWORD 

rilHIS  pamphlet  is  confined  to  a  consideration  of 
^  Federal  taxation  of  income,  as  such  taxation  is 
provided  for  by  the  Revenue  Act  of  1921. 

The  subject  is  considered  under  three  general 
heads: 

(a)  Definition  of  terms  used  in  the  Act. 

(b)  Notation  of  the  principal  modifications 
of  the  Revenue  Act  of  1918. 

(c)  A  resume  of  the  Income  Tax  Law,  with 
comment,  illustrations  and  tables  of  com- 
putation of  tax  applicable  to  individual, 
estate  or  trust  and  corporation  income, 
and  tables  of  comparison  and  effect  of  tax. 

The  object  sought  is  to  assist  taxpayers  in  reading 
the  Law  intelligently  and  applying  it  to  the  facts  of 
their  particular  cases. 

The  analysis  and  suggestions  made  are  of  course 
subject  to  such  modification  as  departmental  regu- 
lations— ^when  issued — may  require. 

The  Law  is  always  the  source  of  authority.  It  is 
printed  in  a  separate  pamphlet. 


p 


i 


i 


CONTENTS 


V 


i 


DEFINITIONS  (Words  and  phrases  used  in  the  Law) Pages  9  to  24 

Income    Tax Paragraphs 

Modifications  of  Revenue  Act  of   1918 I  -    19 

Income    Tax — definition 20 

Sources  of  Tax 21 

To    whom    tax    applies 22-   23 

Kinds     of    Tax 24 

Normal   Tax 25 

Surtax     26-   28 

Tax — Partnerships   and   Personal   Service   Corporations.  .  29-    32 

Estates  or  Trusts 33-    37 

Corporations     38-    46 

Difference  in  rates  of  tax 47-   48 

What  is  taxed 49 

Income — definition   of 50-   53 

Gross    Income definition    54-    55 

Dividend — when  to  be  included  in   return 56 

Income  not  taxable — individual 57-    70 

of  Corporations 7  1  -    72 

Deductions — Individual    73-    90 

— Partnerships  and  Peisona!  Service  Coip'n 91 

— Estates  or  Trusts 92 

— Corporations     93-  1  06 

Items  not  deductible 107-111 

Exempt    Corporations 112-125 

Returns  of  Income — definition 126 

Returns — Who   required  to  make 127 

— of    Individuals     128-129 

— Partnerships      130 

— Estates    or    Trusts 131-133 

— Corporations    134 

Withholciing     Agents 135-136 

— Period    covered    by 13  7-142 

— When  and  where  to  be  filed 1 43-  1  48 

Understatement    of    Income |49 

Taxation     of     Individual     and     Partnership     Income,     as 

Corporate  Income |  50 

6 


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4 

I 


Income  Tax   (Continued) Pamgraplit 

Insurance  Companies — tax   on  income  of 151 

Credit  in  Computing  taxable  income — Individual 153-160 

— Corporations    161-177 

— against  tax  computed  on  return — Individuals.  .  .  .      178-185 

^—Corporations.  .  .  .      186-193 

^— of  tax  collected  at  source 1 94 

Collection   of  tax   at   source — applies   to    what! 195 

—Rate  of 196 

—Tax  Covenant   Interest.  ...  197 

—Limit  of 198-199 

— Exemption,  how  claimed.  .  200 

Advantage  of  to  taxpayer.  201 

— Method   of   securing 202-205 

Ownership  Certificates — Kinds  and  use  of 206-209 

Excess  Profits  and  War  Profits  Tax 210-219 

Payment  of  Tax    220-222 

Receipts  for  tax  paid 223 

Refunds     224 

•—Interest  on    225 

Limitation   of   examinations   and  final   assessment 226 

—Upon   suits  and   prosecutions 227 

— of  Liberty  Bond  Exemptions 228-233 

Chart  of  Liberty  Bond  Exemptions  Pages  84-85 

Consolidated  Returns  for    1917. 234 

Alternative  Tax  on  Personal  Service  Corporations 235 

Porto  Rico  and  Philippine  Islands 236 

Possession  of  the  United  States — Citizen  of  a — 237 

— Income   from   sources  within    238 

Child  Labor  and  Income  Tax 239-240 

TABLES 

Pages 
Table  I.            Comparison   of  rates  and   amounts    of   indi- 
vidual tax    1920-1921-1922 87 

Table   11.           Individual  Normal  and  Surtax  and  percent- 
ages—1921    88-90 

Instruction  for  Use  of  Tables  2  and  3 91 

Table   III.          Individual  Normal  and  Surtax  and  percent- 
ages—1922     92-93 

Table  IV.  Comparison  Corporation  Tax    1921,    1922.  94 

Table  V.  Corporation  Tax  on  various  incomes  1922.  95 

Table  VL  Normal  and  Surtax  Rates    1913  to   1922..  96 

Table   VII.  Rates  under  several  Income  Tax  Laws.  .  .  .  97-98 

Table  VUI.  Effect  of  High  Taxes 99 


6 


St 


f    A 


INDEX 

Definitions  (Words  and  phrases  used  in  the  Law) Pages  9  to  24 

Comment  and  Digest 

{Paragraphs  of  text  are  numbered — References  are  to  paragraphs) 


Par. 
Child    Labor    and     Income 

Tax    239-240 

Collection  at  Source   194 

— advantage   of    201 

— applies  to  what    195 

— e  xemptlon,     how 

claimed    200 

— income  to  be  included 

in  returns 204 

—limit  of    198-199 

— method  securing  ad- 
vantage of 202 

— rate  of    196 

— relief  of  withholding 
agent    on    payment 

by  taxpayer   205 

— tax,  not  to  be  In- 
cluded in  returns 
by  individuals  ....  95 

Consolidated  Returns  1917.  234 

Corporations  —  credit  — 
excess  profits  tax 
for  income  tax. . . .  175 

— for   tax   paid,    discre- 
tion Commissioner.  188 
— interest    on     Govern- 
ment   obligations. .  162 

— for  tax  paid 186 

— tax  paid  different  fis- 
cal    years,     discre- 
tion    Commissioner  189 
Domestic   treated   as   for- 
eign      193 

Excess  profits  tax.  differ- 
ent fiscal  years   . . .     176-177 
Foreign,  to  be  considered 

domestic  when    . . .  154 

Income  of    71-72 

Owning  majority  voting 
stock  foreign,  cred- 
it tax  paid,  illus- 
tration        190-193 

Specific  exemption 163 

— illustration    164-174 

Tax     accrued     not     paid, 

bond   for    187 

—collected     at     source 

not  deductible  by..  9S 
— to  be  considered  for- 
eign when    155 

Credit 

Corporations,  for  comput- 
ing  taxable   income    161-177 
— for  taxes,   what  nec- 
essary to  show. ...  184 
— in     computation     in- 
come taxes   153-177 

— individuals,  for  nor- 
mal tax   153-160 

— tax  paid,  against  tax 
computed  on  re- 
turn        178-193 

— ^In  different  years,  dis- 
cretion Commis- 
sioner    188 


Fab. 

Deductions — 

amortization  war  in- 
vestment by  indi- 
viduals      86 

— corporations    100 

business  expense,  cor- 
porations       93 

— individuals 74 

by  corporations   93-106 

— insurance   companies.      92-106 
^-contributions  or  grifts 

by  individuals  ....  88 
debts  ascertained  to  be 
worthless    by    cor- 
porations      97 

— individuals    84 

depletion  by  corpora- 
tions       101 

— individuals 87 

depreciation    by    corpora- 
tions      19 

— individuals    8S 

dividends     received     by 

corporations 98 

estates  and  trusts  ....  92 

individuals    73-90 

interest  paid  by  corpor- 
ations      94 

— individuals     76 

— items  not  deductible. .    107-111 
losses  by  corporations.  96 

— individuals     81-83 

non-resident  aliens  ....  90 
partnerships    and    Per- 
sonal   Service   Cor- 
porations      91 

property  compulsorily  or 
involuntarily  con- 
verted into  cash, 
reserve  for,  re- 
placements —  indi- 
viduals      89 

— corporations     106 

taxes  paid  by  corpora- 
tions      95 

— individuals   76-80 

dependents,     credit     for 

to  individuals    ....  168 

dividends,    when    to    be 

included  in  return.  68 

excess    profits   tax,    net 

income  subject  to.  .  218 

—corporations  exempt 

from     214 

— credit  211 

— period  less  than  12 

months    217-218 

— rates   of    21S 

— repealed  when   ....  216 
— rules  for  computa- 
tion of 219 

— 1921,  what  is   216 


Par. 
Exemptions,    Estates    or 

Trusts    160 

— individuals   157 

— non-resident    aliens..  159 

Fiscal  Years,  Excess  Profits 

tax    for   diflferent..    176-177 
Gross  Income,   definition   of  54 

— includes   wliat    55 

Income,  definition  of 50-53 

— duty  of  collector  sus- 
pecting understate- 
ment      159 

— not  taxable,  individ- 
uals and  corpora- 
tions             57-70 

—taxation  of  individ- 
ual  or  partnership, 

as    corporation 150 

— tax  collected  at 
source,  included  in 
returns     204 

— understatement     of. .  149 

Income  Tax,  definition  of. .  20 

Insurance  companies,  tax  on 

income    of 151 

Interest,  on  bonds  War  Fi- 
nance   Corporation, 

credit    when 156 

— on    refunds 225 

Liberty     Bond     exemption — 

charts 84-85 

Limitation       Liberty       Bond 

exemption 228-233 

— e  xamination  and 

assessment    226 

^suits  and  prosecu- 
tions      , .  227 

Modifications,      administra- 
tive   provisions. ...  16 
— excess  profits   tax...        17-19 
— Revenue  Act  1918  as 

to    corporations...        11-15 

— individuals     1-10 

Ownership    Certificates,    re- 
girtement    for    and 

forms    of 206-209 

Payment   of   tax 220-222 

Personal    Service    Corpora- 
ations,     alternative 

tax  on 235 

Porto    Rico    and    Philippine 

Islands,  tax  in 236 

Possession  of  United  States, 

citizen    of 237 

— Income   from   sources 

in    238 

Rece'rfs  for  taxes  paid 22  3 

Refunds     . .  224 

— interest  on 225 

Returns,    change    from    one 
accounting      period 

to    another 139 

—-corporations  required 
to   make,   for  what 

period     138 

—decedent,  personal 
representative      t  o 

make     140 

— fiduciary,      who      re- 
quired   to    make.  . .  132 
—fiscal    year,    when    to 

be    made 144 


8 


Returns  Par. 

— for     less     than     It 
months,   law   rt- 

quiring     141 

— form  of  for  corpora- 
tions       184 

estates    or    trusts....  131 

— Individuals    128-129 

—  partnerships     130 

—  withholding'   agents  135 
— Information,    forms 

1065    and   1041    are  183 

— law  requiring  making 

and    filing 147 

— of    income,    definition  126 

— period  covered  by...  137 

— reference    to    forms.  .  148 

— requirement     of     for 

less  than  12  months    139-142 
— sections    of    law    re- 
quiring      136 

— to  be  filed,  when  and 

where     143-145 

— withholding,      when 
and    where    to    be 

filed    146 

— who  required  to  make  127 

Sources   of   tax 21 

Surtax     26 

—1921    and   1922 27-28 

Tax,    applies    to    whom....         22-23 
— income     on     which 
paid,     included     In 

return    182 

--^>ol  lection    at    source, 

applies  to  whom...  194 

— corporation    income.  .         38-46 

— for  1921  and  1922..        39-40 

— difference    in    rates        47-48 

— distributable    trust 

Income     37 

— estates    and    trusts..        33-37 
— excess  profits  tax  for 

1921     42-46 

— income     accumulated 

in    trust,    on 8S 

— held  for  future  dis- 
tribution,   on 86 

— of     deceased     per- 
sons,   on 84 

Tax-covenant    interest 197 

— limit    of    collection 

at    source 198-199 

— kinds    of 24-25 

— levied     on     corporation 

income    88 

Tax    paid    by    partnership, 

credit     to     partner  180 

— credit    in     computing    178-193 
— of     foreign,     to 

citizen     178 

— resident    alien. .  .  179 

— ^foreign,     computation 

of   credit   for 181 

— receipts    for 223 

— to    possession    United 
States,       limitation 

credit    for 181 

— partnerships     and     per- 
sonal   service    cor- 

'•orations      29-32 

— payment    of 220-222 

Taxes    accrued    but    not 

paid,    bond   for. . .  .  183 

Taxpayers,    status    of 160 

What  is   taxed 49 


f 


DEFINITIONS 

Capital  Assets 

The  term  "capital  assets"  as  used  in  this  section,  means  prop- 
erty acquired  and  held  by  the  taxpayer  for  profit  or  investment 
for  more  than  two  years  (whether  or  not  connected  with  his 
trade  or  business),  but  does  not  include  property  held  for  the 
personal  use  or  consumption  of  the  taxpayer  or  his  family,  or 
stock  in  trade  of  the  taxpayer  or  other  property  of  a  kind 
which  would  properly  be  included  in  the  inventory  of  the  tax- 
payer if  on  hand  at  the  close  of  the  taxable  year. 

Capital  Deductions 

The  term  "capital  deductions"  means  such  deductions  as  are  al- 
lowed under  this  title  for  the  purpose  of  computing  net  income 
and  are  properly  allocable  to  or  chargeable  against  items  of 
capital  gain  as  defined  in  this  section. 

Capital  Gain 

The  term  "capital  gain"  means  taxable  gain  from  the  sale  or 
exchange  of  capital  assets  consummated  after  December  31, 
1921. 

Capital  Loss 

The  term  "capital  loss"  means  deductible  loss  resulting  from 
the  sale  or  exchange  of  capital  assets  consummated  after 
December  31,  1921. 

Capital  Net  Gain 

The  term  "capital  net  gain"  means  the  excess  of  the  total 
amount  of  capital  gain  over  the  sum  of  the  capital  deductions 
and  capital  losses. 

Ca  pital  Ga  in — Loss — Ded  uct ion — Assets 

Section  206  of  the  Act  of  1921  defines  "Capital  Assets": 
''Property  acquired  and  held  by  the  taxpayer  for  profit  or 
investment  for  more  than  two  years  (whether  or  not  con- 
nected with  his  trade  or  business),  but  does  not  include 
property  held  for  the  personal  use  or  consumption  of  the 
taxpayer  or  his  family,  the  stock  in  trade  of  the  taxpayer  or 
other  property  of  a  kind  which  would  properly  be  included 
in  the  inventory  if  on  hand  at  the  close  of  the  taxable 
year." 

9 


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i 


I 


10 


Definitions 


4 
f 


Corporations  are  not  permitted  the  benefits  of  the  provisions 
for  "capital  gain"  inasmuch  as  the  tax  rate  on  corporate  in- 
come is  the  same  as  the  rate  provided  for  "capital  gain,"  at 
the  election  of  individuals,  partnerships  and  estates  or  trusts, 
to  wit,  121/2%  of  the  "capital  net  gain." 
For  the  purpose  of  ascertaining  "capital  net  gain"  the  general 
rules  for  ascertaining  gain  or  loss  will  apply.  No  asset  how- 
ever may  be  included  for  the  purpose  of  this  special  tax  which 
does  not  fall  within  the  definition  of  "capital  assets"  as  defined 
above.  Bearing  in  mind  that  every  asset  considered  in  this 
connection  must  have  been  "acquired  and  held  by  the  taxpayer 
for  profit  or  investment  for  more  than  two  years,"  and  must 
not  include  any  of  the  items  prohibited.  The  factors  to  be 
considered  and  shown  in  schedule  are : 


a 

& 

c 

fl 

e 

/ 

0 

h 

i 

Cain 

J 

Cost 

of 
prop- 
erty. 

Date  ac- 
quired and 
since  which 
continuous- 
ly held. 

Selling 
price. 

Cost 

when 

acquired. 

Value 
March 
1,1913 

Cost  of 

addi- 

ditions, 

if  any. 

Depre- 
ciation. 

Cost  if  (f) 
and  or  C7) 
are  to  be 
considered. 

Loss 

Capital  net  gain  =  (i)  —  (j). 

(Regard  should  be  had  to  any  change  of  "basis"  under  Section 

201  of  the  law,  due  to  distributions  with  respect  to  stock  of 

corporations.) 

When  a  taxpayer,  who  may  have  the  benefit  of  these  provisions 
of  the  law,  elects  to  take  advantage  of  it,  tax  will  be  computed 
on  his  net  income  other  than  his  "capital  net  gain"  at  the  nor- 
mal and  surtax  rates  applicable  thereto  without  reference  to 
the  capital  gain  provisions  of  the  law.  The  amount  of  tax  so 
computed  plus  121/2%  of  the  "capital  net  gain,"  shall  be  the 
amount  of  tax  to  be  paid;  Provided,  that  when  an  election  is 
made  to  take  advantage  of  the  "capital  gain"  provisions  of  the 
law,  the  "total  tax  shall  in  no  case  be  less  than  12^/2%  of  the 
total  net  income."     It  may  be  more. 

In  the  case  of  a  partnership,  or  a  trust  or  estate,  the  segrega- 
tion between  capital-gain,  and  other  income,  will  be  made  by 
the  firm  or  individual,  and  members  of  the  partnership  or  bene- 
ficiaries of  the  trust  will  use  the  information  furnished  them 
in  making  their  individual  returns  of  income  according  to  the 
requirements  of  Section  218  or  219  of  the  Law. 


Definitions 


11 


'J, 


Collector 

The  term  "collector"  means  the  Collector  of  Internal  Revenue. 
Commissioner 

The  term  "Commissioner"  means  the  Commissioner  of  In- 
ternal Revenue. 

Corporation 

The  term  "corporation"  includes  associations,  joint-stock  com- 
panies, and  insurance  companies. 
Dividends 

That  the  term  "dividend"  when  used  in  this  title  (except  in 
paragraph  10)  of  subdivision  (a)  of  section  234  and  para- 
graph (4)  of  subdivision  (a)  of  section  245  means  any  dis- 
tribution made  by  a  corporation  to  its  shareholders  or  mem- 
bers, whether  in  cash  or  in  other  property,  out  of  its  earnings 
or  profits  accumulated  since  February  28,  1913,  except  a  dis- 
tribution made  by  a  personal  service  corporation  out  of  earn- 
ings or  profits  accumulated  since  December  31,  1917,  and  prior 
to  January  1,  1922. 

Dividend:   (1) 

Is  a  distribution  by  a  corporation  to  its  shareholders  out  of  its 
earnings  or  profits  ?  A  dividend  is  made  by  resolution  adopted 
by  the  Board  of  Directors  of  the  dividend  making  corporation. 
Payment  of  the  dividend  is  with  cash,  or  with  property  other 
than  cash,  in  which  the  surplus  has  been  invested.  Payments 
of  dividends  are  charged  against  and  reduce  the  amount  of 
surplus  owned  and  retained  by  the  dividend  making  corpora- 
tion. The  portion  of  a  dividend  taxable  is  the  amount  thereof 
which  was  paid  from  earnings  of  the  corporation  accumulated 
subsequent  to  February  28,  1913  (the  beginning  of  the  taxa- 
tion of  income  under  the  Sixteenth  Amendment  to  the  Federal 
Constitution.) 

The  Income  Tax  Law  provides  that  so  long  as  a  corporation 
has  on  hand  (not  distributed)  any  earnings  accumulated  after 
February  28,  1913,  no  dividend  paid  by  the  corporation  can  be 
exempt  from  being  included  in  a  return  of  income.  When  all 
earnings  accumulated  after  February  28,  1913  have  been  dis- 
tributed, then  any  surplus  on  hand  which  was  accumulated 
prior  thereto  may  be  distributed  free  of  tax. 
The  Act  of  1921  further  provides  that  when  there  remains  no 
surplus  accumulated  during  the  taxable  period,  but  that  there 
is  surplus  applicable  to  dividends  and  which  was  accumulated 


12 


Definitions 


prior  to  the  taxable  period,  and  where  such  free  surplus  was 
the  result  of  earnings  of  the  corporation  or  increase  in  value 
of  property  accrued  prior  to  March  1,  1913;  if  a  dividend  is 
declared  and  paid  out  of  such  free  surplus,  it  will  have  no  effect 
in  determining  the  amount  of  taxable  gain  upon  a  subsequent 
sale  of  such  stock,  but  if  it  should  ever  become  necessary  to 
compute  the  amount  of  deductible  loss  on  a  sale  of  such  stock, 
then  the  cost  of  the  stock  must  be  reduced  by  the  aggregate 
amount  of  dividends  received  free  of  tax. 
Illustration : 

Let  us  suppose  a  corporation  is  formed  with  10  shares  of  stock 
which  are  sold  for  $1,000  and  with  the  money  one  bond  is  pur- 
chased for  $995,  and  that  on  March  1,  1913,  the  bond  was  sold 
for  $1,005;  and  thereafter  the  corporation  declared  and  paid  a 
dividend  of  $10,  this  being  the  entire  amount  of  its  surplus 
(the  effect  of  tax  as  a  charge  against  surplus  is  purposelv 
omitted  in  this  illustration)  — 

The  first  question  presented  is,  how  much  of  this  $10  actual 
profit  is  subject  to  tax  to  the  corporation?  The  answer  is 
shown  as  follows: 


Cost 

Value 
March  1,  1913 

9ale 

Price 

GaiQ 

$995 

$1,000 

$1,005 

$5        ^ 

Then  obviously,  $5  of  the  dividend  is  from  tax-free  surplus. 
If  upon  a  sale  of  the  stock  after  dividend,  the  question  is  one 
of  computation  of  profit  on  the  sale  of  the  stock,  the  tax-free 
dividend  will  have  no  effect ;  as, 


Cost  of 
Stock 

Amount  of 

Tax-free 

Dividend  Paid 

Basis  for 

Determining 

Gain 

Value 

Maroh  1, 

191.3 

Sale 
Price 

Taxable 
(Jain 

$1,000 

$5                    $995 

$1  000 

$1,005 

$5 

If  the  question  is  the  computation  of  amount  of  deductible 
loss,  the  cost  of  the  stock  sold  must  be' reduced  by  the  amount 
of  tax-free  dividend  received  on  it ;  as, 


Definitions 


13 


Cost  of 
Stock 


$1,000 


Amount  of 
Tax-Free 
Dividend 


$5 


Basis  for 

Determining 

Loss 


$995 


Value 

March  1, 

1913 


$1,000 


Sale 
Price 


$990 


Loss 


$5 


T 


But  for  the  change  in  the  Law  as  made  by  the  Act  of  1921, 

the  deductible  loss  would  have  been  $10. 

The  statute  provides,  in  addition  to  the  foregoing,  that  any 

distribution  (whether  in  cash  or  other  property)   made  by  a 

corporation  to  its  shareholders  or  members  otherwise  than  out 

of 

(1)  Taxable  surplus  (accumulations  after  March  1,  1913),  or 

(2)  Nontaxable  surplus  (accumulations  prior  to  March  1, 
1913,  or  appreciation  of  property  accrued  prior  to  such 
date)  ;  then  in  that  event,  such  distribution  "shall  be 
applied  against  and  reduce  the  basis  provided  in  Section 
202  for  the  purpose  of  ascertaining  the  gain  derived 
from  or  loss  sustained  from  sale  or  other  disposition  of 
stock  or  shares  by  the  distributee."  This  is  equivalent 
to  saying  (and  nothing  more)  that  when  all  surplus  of 
every  description  has  been  distributed,  any  further  dis- 
tributions are  from  capital,  and  to  the  extent  thereof 
shall  reduce  what  would  otherwise  have  been  the  basis 
for  determining  gain  or  loss  upon  a  "sale  or  other  dis- 
position of  the  stock  or  shares  by  the  distributee." 

Dividend : 

Cash  Dividends— Those  paid  with  cash  or  its  equivalent,  or 
with  property  other  than  cash,  are  subject  to  the  surtax  to 
the  owners  thereof  who  are  individuals  and  whether  received 
directly  by  such  individuals  or  through  the  intervention  of 
partnerships  or  estates  or  trusts. 

When  the  owner  and  recipient  of  such  dividend  is  a  corpora- 
tion the  dividend— as  part  of  its  gross  income-must  be  re- 
ported  in  a  return  of  income,  but  is  to  be  deducted  in  the  com- 
putation of  net  income  to  be  subjected  to  tax. 
Dividends  are  wholly  exempt  from  the  normal  tax  to  individ- 
uals. Dividends  become  part  of  the  gross  income  of  the  re- 
cipients thereof  when  the  cash  or  other  property  with  which 
they  are,  or  are  to  be  paid,  "is  unqualifiedly  made  subject  to 
their  demands." 

The  provision  in  Section  201    (f)    of  the  Act  of  1921,  that 


14 


Definitions 


dividends  paid  within  the  first  60  days  of  the  taxable  year 
"shall  be  deemed  to  have  been  made  from  earnings  or  profits 
accumulated  during  previous  taxable  years,"  has  no  reference 
to  taxation  of  individual  incomes,  nor  to  any  case  where  the 
individual  normal  and  surtax  applies.  The  provision  has  to 
do  solely  and  only  with  the  computation  of  invested  capital  of 
corporations  whose  income  is  subject  to  excess  profits  tax. 

Stock  Dividend: 

Is  a  term  which  is  applied  to  a  situation  where  the  directors  of 
a  corporation  declare  a  dividend,  on  the  basis  of  the  isaued  and 
outstanding  shares  of  the  corporation,  and  which  dividend  is 
to  be  charged  against  and  reduce  the  amount  of  surplus  of  the 
corporation  carried  as  such  at  the  time  of  declaring  the  divi- 
dend—but, instead  of  paying  the  dividend  in  cash,  it  is  paid 
with  shares  of  the  dividend-paying  corporation  which  were 
authorized  at  the  time  of  the  dividend  declaration  but  which 
shares  had  never  been  issued. 

The  journal  entry  in  such  a  case  transfers  the  amount  of  divi- 
dend from  the  surplus  account  to  the  capital  account  of  the 
corporation.  The  Supreme  Court  of  the  United  States  has  held 
that  this  transaction  does  not  represent  any  gain  to  the  share- 
holder; that  what  he  had  before  the  dividend  was  a  share  of 
stock  with  surplus  behind  it  (in  the  ownership  of  the  dividend- 
paying  corporation)  in  the  amount  of  such  surplus  transferred 
by  this  operation;  that  what  the  shareholder  has  after  such 
operation  is  an  increased  number  of  shares,  but  with  no  addi- 
tional corporate  assets  behind  them  than  was  true  before  the 
dividend  and  for  this  reason  a  stock  dividend,  as  such,  is  not 
subject  to  income  tax. 

For  example: 

A  corporation  has  issued  and  outstanding  shares  of 

the  par  value  of   $100,000 

and  a  surplus  of   10,000 

The  total  capital  accounted  for  as  above. . .  $110,000 

This  corporation  makes  a  10%  stock  dividend  (de- 
clares a  10%  dividend  and  pays  it  with  100  shares 
of  its  before  unissued  shares),  so  that  after  the 
dividend  the  corporation  has  outstanding  1100 
shares  representing  the  same  $110,000 


Definitions 


15 


In  this  case  the  100  shares  of  new  stock  spread  the  investment 

™1  fl      v^'^'^'u  !?^  ^^^^  '^^^'''  ^"^  ^^^'^  is  "^  taxable 
income  to  the  shareholder.    The  cost  of  each  share  of  stock  is 

nir  f  IT^lf  *  ^'''^'''^  ^^^"^  ^i^i^i"^  t^e  investment  in  the 
old  stock  by  the  total  number  of  shares,  old  and  new  This 
new  cost  per  share  will  be  the  basis  for  determining  gain  or 
loss  upon  a  sale  of  the  stock. 

The  Supreme  Court  of  t>.e  United  States  has  recently  held 
that  If  a  corporation  (A)  should  sell  to  corporation  (B)  the 
assets  representing  the  $10,000  of  surplus  of  (A),  in  consid- 
eration of  100  shares  of  (B),  that  while  there  might  be  no 
taxable  profit  to  (A)  arising  from  the  transaction,  ye  if  tSe 
100  shares  of  (B)  stock  should  be  delivered  to  the  share! 
holders  of  corporation  (A),  so  that  they  held  1100  shares  rep- 

loo^'lil^l  /^^?  ^f^^  ^'  '"^  ^^^  fi^«*  ^^^"^Ple  above,  the 
fi?.  «l  vf  M^  ^^l  '^^'^  ^°^^^  represent  taxable  income  to 
the  shareholders  of  corporation  (A),  and  as  a  "profit"  would 
be  subject  to  both  the  normal  and  surtax  to  individuals  • 
whereas  if  corporation  (A)  owned  the  shares  of  (B),  or  had 
it  f  A  ^'^1f ""l V^  ^^^  i"  P^^^^t  for  the  assets  of  (A),  and 
lZ.^Al  ?f^  ^^l^i'i  ^  ^.^^^^""^  °^  ^^^^  «^  t^«  outstanding 
f^rjl  ^^/^^  ^^^Fl'^  ^^''  ^^^^^^^^  ^ith  the  shares  of 
(B),  such  dividend  would  have  been  taxable  but  subject  to  only 
the  surtax  to  shareholders  of  (A). 

Domestic 

The  term  "domestic"  when  applied  to  a  corporation  or  partner- 
ship means  created  or  organized  in  the  United  States. 

Fiduciary 

l^^J"^  "fiduciary"  means  a  guardian,  trustee,  executor,  ad- 
ministrator,  receiver,  conservator,  or  any  person  acting  in  any 
fiduciary  capacity  for  any  person,  trust  or  estate. 

Fiscal  Years  1920-1921  and  1921-1922 

A  fiscal  year  is  a  period  of  twelve  months  ending  with  the  last 
day  of  some  month  other  than  December. 

Individuals  and  corporations  having  a  fiscal  year  beginning  in 

1922  wnir'^'''^  V^^^'  "'  ^^^^^^^S  in  1921  and  endini  in 
1922  will  compute  their  net  taxable  income  for  the  entire  fiscal 
year—"— 


f 


♦ 


DAMAGED  PAGE(S) 


16 


Definitions 


(a)  The  tax  on  the  entire  net  income  will  be  computed  at 
the  rates  for  the  calendar  year  in  which  the  fiscal  year 
begins ; 

(b)  The  tax  on  the  entire  net  income  will  be  computed  at 
the  rates  for  the  calendar  year  in  which  the  fiscal  year 
ends; 

(c)  The  tax  to  be  paid,  will  be  the  sum  of : 

(1)  Such  a  portion  of  (a)  as  the  part  of  the  fiscal 
year  falling  within  the  calendar  year  in  which 
the  fiscal  year  begins,  or  as  such  fraction  of  the 
fiscal  year,  is  of  that  calendar  year,  and 

(2)  Such  a  portion  of  (b)  as  the  part  of  the  fiscal 
year  falling  within  the  calendar  year  in  which 
the  fiscal  year  ends,  or  as  such  fraction  of  the 
fiscal  year,  is  of  that  calendar  year. 

In  the  case  of  partnerships,  however,  the  rule  is  different. 
Partnerships  compute  their  net  income  without  regard  to  its 
taxation.  The  several  interests  of  the  partners  are  determined. 
The  members  of  the  partnership  then  separate  their  several 
shares  of  partnership  profits  in  the  proportions — 

(a)  which  the  portion  of  the  taxable  year  falling  within  the 
calendar  year  in  which  the  fiscal  year  begins,  or  as  such 
fraction  of  the  fiscal  year,  is  of  that  calendar  year,  and 

(b)  which  the  portion  of  the  fiscal  ye?»r  falling  within  the 
calendar  year  in  which  the  fis^*^'  f^j^r  ends,  or  as  such 
fraction  of  the  fiscal  year,  is  c.     'it  calendar  year. 

(1)  The  rates  for  the  calendar  yfear  in  which    (a) 
falls  will  be  applied  to  tl^e  amount  of  (a) 

(2)  The  rates  for  the  calendar  in  whfch  (b)  falls  will 
be  applied  to  the  am^'\^nt  of  (b)     '^ 

And  the  sum  of  (1)  and  (2)  will  be  the  amoun\^of  tax  on 
partnership  income  payable  by  ^he  person  making  the  return 
therefor.  < 

As  a  rule,  individuals  make  returns  of  income  on  the  basis  of 
the  calendar  year.  Partnership  profits  are  included  in  in- 
dividual returns  for  the  i*alendar  year  in  which  the  fiscal  year 
of  the  partnership  ends — (where  the  partnership  year  is  also 
the  calendar  year,  no  question  arises) — so  that  the  portion  of 
partnership  profits  represented  by  (b)  (in  the  second  para- 
graph above)  would  take  the  same  rates  as  the  other  income 
of  the  taxpayer  for  the  calendar  year  in  which  (b)  falls. 


Definitions 


17 


if-. 


The  change  in  rate  is  on  the  basis  of  the  calendar  year  Where 
change  m  the  law  makes  tax  computed  for  part  of  a  fiLcal  veir 
incorrect   any  amount  paid  before  or  after  passfge  of  the  Act 

SfcaTion  of  t'"^'  ^^"  be  adjusted  in  accordance^^ith  the  ap' 
plication  of  the  new  law  by  way  of  credit  or  refund  as  the 
case  may  be,  so  that  the  tax  paid  will  conform  to  lega?  piin! 
tion  as  between  the  old  and  the  new  law.  Prescrip- 

Foreign 

The  term  "foreign"  when  applied  to  a  corporation  or  partner- 
ship, means  created  or  organized  outside  the  United  Stat^ 
Gain  or  Loss— Basis  for  Determining: 
Three  cases  are  provided  for  by  the  Law 

rM   w!!^''®  property  was  acquired  after  February  28   1913- 

b)  Where  property  was  acquired  before  March  1    1913' 

(c)  Upon  an  exchange  of  property.  '     ^"^^ 

The  basis  for  determining  gain  or  loss  in  the  first  case  is  the 

cost  of  the  property.    There  are  three  exceptions"  the  ^neral 

^^^  ^l-*u^  determination  is  in  connection  with  pronertv 
which  should  be  included  in  the  inventory,  theTTin^ 
ventory  value  is  the  basis  for  determining  gain  of loS. 

^^^  berTl'  19I0  W^  was  acquired  by  gift  after  Decem- 
Der  61  192i)aHriija^ia  shall  be  what  should  have  been 
the  basis  m  the  h^nds  of  the  donor,  if  such  donor  dIS 
not  acqui^re  the  p^perty  by  gift,  or  in  the  hands  of  the 

St  Tfhr^  -n"^'  '^  ^^^"^  ''  ^^  "^*  acquired  by 
gift     It  the  gift  w^  on  or  before  December  31    1920 

fcrty  at  the  time  it  was  acquired. 

inheritance,  the  basis  is  the  fair  market  price  or  vilue 
of  the  property  at  the  time  of  r.cquisition. 

JwL^f '^  ^°''  5«t«™i"in?  the  gain  x.r  loss  in  the  second  case 
(where  property  was  acquired  prior  to  March  1    1q1^^  i=       * 
but  the  method  of  allocating  thisTa-^  or  S  for  the^urS 
of  income  tax  is  determined  in  the  following  manner:      '^ 

'The  difference  between  sales  price  and  the  fnii«™!«     v 
2oes  in  the  return)  following  bases 


(3) 


^  m- 


18 


Definitions 


mm 


(a)  In  the  case  of  gain,  the  higher  of  the  two  values,  "coat 
or  value  March  1,  1913." 

(b)  In  the  case  of  loss,  the  lowest  of  the  two  values  "coat 
or  value  March  1,  1913." 

(c)  Where  sales  price  falls  between  these  two  values  (cost, 
or  value  March  1,  1913)  there  is  neither  gain  nor  loss 
to  be  included  in  a  return  of  income. 

EXAMPLE 

1  share  of  stock  purchased  for  $100  prior  to  March  1,  1913, 
and  sold  after  that  date: 


Cost 

Value 
March  1,  1913 

Sale 
Price 

Gain 

liOSS 

(a) 

$100 

$101 

$105 

$4 

•    •   ■    • 

(b) 

100 

95 

90 

■   •   ■   • 

$5 

(c) 

100 

95 

98 

None 

None 

(d) 

100 

98 

101 

$1 

.... 

In  the  third  case  (c)   (exchange  of  property) — 

The  basis  for  determining  gain  or  loss  is,  "the  readily  real- 
izable market  value"  of  the  properties  exchanged.  The  ex- 
cess of  this  value  on  one  side  over  that  on  the  other  side  will 
constitute  the  amount  of  gain  and  the  reverse  will  constitute 
the  amount  of  loss,  resulting  from  the  transaction;  Provided, 
that  neither  a  gain  nor  loss  is  to  be  recognized — 

(1)  When  the  property  exchanged  is  held  for  investment, 
or  for  productive  use  in  trade  or  business  (not  in- 
cluding stock  in  trade  or  other  property  primarily 
held  for  sale).  This  exception  is  confined  to  cases 
where  the  exchange  on  both  sides  is  of  a  like  kind  or 
is  devoted  to  a  like  use. 

(2)  When  stock  or  securities  are  exchanged  for  stock  or 
other  securities  as  a  result  of  a  reorganization. 


I 


Definitions 


19 


t  • 


(3)  When  a  person  who  owns  property,  real,  personal  or 
mixed,  causes  a  corporation  to  be  formed  to  which  he 
conveys  this  property  and  immediately  after  such  con- 
veyance he  is  in  control  of  the  corporation,  or  where 
a  corporation  already  formed  is  availed  of  and  imme- 
diately after  the  conveyance  such  person  is  in  control 
of  the  corporation.  Control  means  80%  of  all  classes 
of  stock  issued  and  outstanding. 

The  basis  of  "cost"  or  "market  value  March  1,  1913"  may  con- 
tinue in  the  case  of  "exchanged"  property,  where  the  exchange 
is  treated  as  merely  taking  the  place  of  property  exchanged, 
except  that  if  on  one  or  both  sides,  there  is  money  or  other 
property  which  has  a  readily  realizable  market  value,  this 
money  or  value  shall  be  applied  and  reduce  the  "basis"  for  de- 
termining gain  or  loss  of  him  who  receives  the  money  or  prop- 
erty of  readily  realizable  market  value  and  if  the  result  of  the 
application  shall  exceed  the  "basis"  used  in  comparison,  the 
excess  shall  be  taxable  to  him. 

Where  property  is  involuntarily  or  compulsorily  converted 
into  cash  or  its  equivalent,  the  proceeds  of  such  conversion  may 
be  used  in  replacing  the  property  which  was  converted  and  the 
replaced  property  will  be  "held  to  take  the  place"  of  the  prop- 
erty it  replaces.  Any  surplus  remaining  after  such  replace- 
ment would  be  taxable. 

Property  acquired  as  a  result  of  a  wash  sale  so  that  no  loss 
would  be  allowed  as  a  deduction  in  a  return  of  income,  will  be 
held  to  have  behind  it  the  same  capital  investment  as  was  the 
case  with  the  property  which  was  sold  and  repurchased. 

Government  Contract 

The  term  "government  contract"  means  (a)  a  contract  made 
with  the  United  States,  or  with  any  department,  bureau,  officer, 
commission,  board,  or  agency,  under  the  United  States  and 
acting  in  its  behalf,  or  with  any  agency  controlled  by  any  of 
the  above  if  the  contract  is  for  the  benefit  of  the  United  States, 
or  (b)  a  subcontract  made  with  a  contractor  performing  such 
a  contract  if  the  products  or  services  to  be  furnished  under  the 
subcontract  are  for  the  benefit  of  the  United  States.    The  term 


20 


Definitions 


"government  contract  or  contracts  made  between  April  6  1917 
and  November  11,  1918,  both  dates  inclusive''  when  applied  to 
a  contract  of  the  kind  referred  to  in  clause  (a)  of  this  sub- 
division, includes  all  such  contracts  which,  although  entered 
into  during  such  period,  were  originally  not  enforceable,  but 
which  have  been  or  may  become  enforceable  by  reason  of  sub- 
sequent validation  in  pursuance  of  law. 

Instalment 

Where  instalment  payments  are  made,  in  a  transaction  upon 
the  whole  of  which  there  is  a  profit,  each  instalment  has  in  it 
the  elements  of  capital  and  profit— the  sum  of  the  instalment 
gams  in  any  year  will  be  accounted  for  in  the  year  in  which 
the  payments  made  are  received. 

Inventories 

Are  taken  at  either — 

(a)  Cost,  or  at 

(b)  Cost  or  market  value,  whichever  is  the  lower. 
Inventories  taken  at  cost  will  show  the  sum  of  cost  prices  in 
the  inventory. 

When  inventories  are  taken  on  the  alternative  basis,  only  the 


lowest  of  the  two  values, 
the  inventory;  as. 


"cost"  or  "market,"  is  carried  into 


h 

Unit 

0 

/ 

a 

c 

d 

ff 

Article 

Quantity 

Cost 

Market 

at 

Inventory 

Total 
Cost 

$600 

48 

300 

Total 
Market 

Inventory 

Shoes 

Hose 

Hats 

10  dozen 
20  dozen 
10  dozen 

$60.00 

2.40 

30.00 

$48.00 

2.25 

35.00 

$480 

45 

350 

$480 

45 

300 

$948 

$875 

$825 

If  inventory  is  taken  at  "cost,"  the  result  as  shown  in  column 
(e)  would  be  used  and  the  inventory  schedule  would  not  have 
columns  (f)  and  (g) 


j 


^    .A 


t  • 


Definitions 


21 


If  the  inventory  is  taken  on  the  alternative  basis,  inventory 
should  be  in  above  form  and  the  value  shown  in  column  (g) 
would  be  the  value  of  the  inventory  carried  into  the  balance 
sheet. 

The  basis  for  determining  gain  or  loss  of  property  carried  by 
inventory,  is  the  last  inventory  value  of  such  property. 

Military  or  Naval  Forces  of  the  United  States 

The  term  "military  or  naval  forces  of  the  United  States"  in- 
cludes the  Marine  Corps,  the  Coast  Guard,  the  Army  Nurse 
Corps,  Female,  and  the  Navy  Nurse  Corps,  Female,  but  this 
shall  not  be  deemed  to  exclude  other  units  otherwise  included 
within  such  terms. 


Net  Loss 

The  beginning  of  a  period  in  which  a  net  loss  may  be  claimed 
is  January  1,  1921.  It  is  confined  to  losses  sustained  in  or  re- 
sulting from  the  operation  of  a  trade  or  business  regularly 
carried  on  by  the  taxpayer.  In  such  a  case,  losses  sustained 
from  the  sale  of  capital  assets,  as  real  estate,  machinery,  etc., 
will  be  included. 

Individuals  not  engaged  in  trade  or  business  cannot  have  the 
benefit  of  a  net  loss. 

Individuals  engaged  in  a  trade  or  business  may  have  a  net  loss 
in  the  business,  and  if  they  have  other  taxable  income,  this 
net  loss  may  be  set-off  against  such  other  taxable  income.  The 
benefit  of  this  Section  is  also  allowed  to  members  of  a  partner- 
ship and  beneficiaries  of  a  trust  or  estate  and  to  insurance 
companies. 

Where  a  taxpayer  sustaining  a  net  loss  has  a  fiscal  year  be- 
ginning in  1920,  the  amount  of  the  net  loss  which  can  be 
availed  of  is  that  portion  of  such  loss  which  the  portion  of  the 
fiscal  year  falling  in  1921  is  of  the  entire  fiscal  year. 


l'   U 


n 

n 


1 

I 


""       o 


22 


Definitions 


Net  loss  is  computed  as  follo^vs: 

(1)  Gross  income  subject  to  inclusion  in  a  return 


of  income,  say 

Add — 

(2)   Interest    on    Liberty   Bonds 

(exempt) ,  say,  $4,290 

Interest  on  municipal  bonds  10,000 
Any  other  exempt  income 


$100,000 


Interest  paid  on  loans  to  buy 
Liberty  Bonds  (not  origin- 
ally purchased)    $100,000  at 

5%,  3  months   $1,250 

Interest  on  loans  to  buy 
municipals,  $50,000  at  6%,  2 
months    500 


$12,500 


Deduct 1^50 

Add  excess  of  cash  received 

over  interest  paid 

(3)  Amount  of   loss   outside   of 

business,  say, 

Amount  of  gains  outside  of 

business    

— »—  -  - 

Add  excess  of  losses 3,500 

(4)  Dividends  on  stock  of  do- 
mestic corporations,  when  re- 
ceived by  corporations 1,000 

(5)  Portion  of  depletion  deduc- 
tion based  on  discovery  in 
lieu  of  cost,  say, 1,500 

Total    $118,500 

The  sum  of  deductions  allowed 
under  Sections  214  or  234  of  the 
Law   (itemized)    120,000 

Net  loss $     1,500 

Item  (3)  above  would  appear  to  be  applicable  only  in  the 
case  of  individuals. 

Item  (4)  above  would  appear  to  be  applicable  only  in  the  case 
of  corporations. 


$14,250 


Definitions 


23 


A  net  loss  (within  the  provisions  of  the  statute  and  regula- 
tions) is  deductible  from  the  net  income  of  a  taxpayer  for  the 
succeeding  taxable  year ;  and  if  in  excess  of  the  net  income  of 
the  succeeding  taxable  year,  the  amount  of  such  excess  shall 
.  be  allowed  as  a  deduction  from  the  gross  income  in  computing 
the  net  income  for  the  next  succeeding  taxable  year.  The  net 
loss  not  recouped  from  the  income  of  the  taxpayer  for  the  two 
years  next  succeeding  the  taxable  year  in  which  the  net  loss 
was  sustained,  remains  a  loss  to  the  taxpayer. 

A  taxpayer  sustaining  a  net  loss  should  prepare  a  schedule 
showing  the  computation  of  the  net  loss  and  the  amount 
thereof.  This  schedule  should  be  attached  to  the  return  of 
income  for  the  succeeding  taxable  year  and  in  the  event  the 
amount  of  any  loss  shown  by  such  schedule  exceeds  the  net 
income  of  such  succeeding  taxable  year,  there  should  be  added 
to  the  schedule  the  amount  of  the  net  loss  used  as  a  set-off 
against  the  net  income  of  such  succeeding  taxable  year,  and  a 
copy  of  this  schedule  should  be  attached  to  the  return  of  in- 
come of  the  taxpayer  for  the  next  succeeding  taxable  year. 

Ordinary  Net  Income 

The  term  "ordinary  net  income"  means  the  net  income  com- 
puted in  accordance  with  the  provisions  of  this  title,  after 
excluding  all  items  of  capital  gain,  capital  loss,  and  capital 
deductions. 

Paid 

The  term  "paid"  for  the  purposes  of  the  deductions  and  credits 
under  this  title,  means  "paid  or  accrued"  or  "paid  or  incurred 
and  the  terms  **paid  or  incurred"  and  "paid  or  accrued"  shall 
be  construed  according  to  the  method  of  accounting  upon  the 
basis  of  which  the  net  income  is  computed  under  section  212. 

Personal  Service  Corporation 

The  term  "personal  service  corporation"  means  a  corporation 
whose  income  is  to  be  ascribed  primarily  to  the  activities  of 
the  principal  owners  or  stockholders  who  are  themselves  regu- 
larly engaged  in  the  active  conduct  of  the  affairs  of  the  cor- 
poration and  in  which  capital  (whether  invested  or  borrowed) 
is  not  a  matierial  income-producing  factor;  but  does  not  include 
any  foreign  corporation,  nor  any  corporation  50  per  centum 
or  more  of  whose  gross  income  consists  either  (1)  of  gains, 


t* 


24 


Definitions 


profits,  or  income  derived  from  trading  as  a  principal,  or  (2) 
of  gams,  profits,  commissions,  or  other  income,  derived  from  a 
government  contract  or  contracts  made  between  April  6   1917 
and  November  11,  1918,  both  dates  inclusive. 
Persons 

The  term  "person"  includes  partnerships  and  corporations,  as 
well  as  individuals.  ' 

Secretary 

The  term  "secretary"  means  the  Secretary  of  the  Treasury. 
Taxable  Year 

Ji'A*^"?"*'*^^'?  ^^""  '"*^"«  ^^^  calendar  year,  or  the  fiscal 
Iww^^"^.''"""*^  '"*^''  *='''^"<*"  y^"^'  "Pon  the  basis  of 
7^9  T^^  1  '"'?i"*  \^  computed  under  section  212  or  section 
;„,:;  if"  3^"^^  y®*'"  ""^^n^  »"  accounting  period  of 

Smh'^r^^^"^'^'?.''"  11"  ^^'*  "^^y  °^  *"y  month  other  than 
foai  ,h.n  wt  ®'1  *^*"*  y"^""'  *°  b^  '^^"^'l  the  taxable  year 
1921,  shall  be  the  calendar  year  1921,  or  any  fiscal  year  endinir 
durmg  the  calendar  year  1921.  enaing 

Taxpayer 

Sf  *f  ™  "t«?P*ye«-"  includes  any  person,  trust  or  estate  sub- 
ject to  a  tax  imposed  by  this  Act. 

United  States 

The  term  "United  States"  when  used  in  a  geographical  sense 
mcludes  only  the  States,  the  Territories  of  Alaska  and  H«wau' 
and  the  District  of  Columbia.  ""waii, 

Withholding  Agent 

deductTnH''^"iL'l°'fi"^  ''«^""*"  "^^"«  »"y  person  required  to 
2lf"o?sSioT237?''  ''"^  *''  ""•^""-  ''''  '"•"''^^""^  ^*  -'^«- 


I 


Income  Tax 


25 


THE  FEDERAL  REVENUE  ACT  OF  1921 
Modification  of  the  Act  of  1918  as  to  Individuals 

1  An  essential  change  is  made  in  the  rule  for  determining 
gain  or  loss  in  case  of  the  sale  of  property  acquired  by  gift 
between  living  persons,  but  this  change  does  not  apply  to 
testamentary  gifts. 

2  New  rules  are  provided  for  determining  gain  or  loss  in 
connection  with  the  exchange  of  property. 

3  The  net  loss  provision  of  the  Act  of  1918  is  revived  in 
modified  form. 

4  A  new  provision  provides  for  taxing,  separately  from  or- 
dinary income,  capital  gains,  realized  upon  a  sale  or  other 
disposition  of  property  acquired  and  held  for  profit  or  in- 
vestment for  more  than  two  years  next  preceding  the  sale, 
and  makes  provision  for  the  ascertainment  of  such  gains. 

5  There  is  a  modification  of  the  definition  of  gross  income 
as  contained  in  the  Act  of  1918  and  as  that  Act  was  modified 
by  regulations. 

6  A  new  provision  is  added  preventing  deduction  for 
amortization  of  "present  value"  of  expected  future  income 
from  life  or  other  terminable  interests  received  by  gift,  be- 
quest or  inheritance. 

7  A  modification  is  made  of  exemptions  to  individuals,  in- 
cluding non-resident  aliens. 

8  Section  220  of  the  Act  of  1918,  which  provision  was  sub- 
stantially carried  in  all  Income  Tax  Acts,  provided  for  the 
taxation  of  undistributed  surplus  and  income  of  corporations 
which  was  not  required  or  necessary  for  the  purposes  of  the 
corporation.  This  provision  is  modified  by  the  Act  of  1921, 
in  view  of  the  stock  dividend  decision  of  the  Supreme  Court 
of  the  United  States,  so  that  in  lieu  of  taxing,  upon  Certifi- 
cate of  the  Secretary  of  the  Treasury,  such  undistributed 
surplus  to  stockholders  as  individual  income  at  individual 
rates,  there  is  to  be  instead  a  flat  tax  of  25%  of  the  net 
income  for  each  year  in  addition  to  the  corporation  income 
tax  upon  the  net  income  of  the  corporation  for  each  year,  or 
the  stockholders  may  agree  to  be  taxed  on  such  net  income  in 
the  same  manner  as  is  provided  for  partnerships. 


1 


26 


Income  Tax 


Income  Tax 


27 


of  Jr^Hif  a."^f  location  of  the  rule  determining  the  amount 
of  credit  against  United  States  tax,  for  tax  paid  to  foreign 
countries  or  to  a  Possession  of  the  United  States. 

10     There  is  a  modification  of  the  basis  for  requiring  returni 
of  income  from  individuals. 
Corporations 

iL  ^i^^ /®^"'v ^P  .^^  ^'■''^^  '"^^^^^  ^»  slightly  modified  to 
provide  for  relief  m  cases  where  the  majority  of  the  net 
income  of  a  domestic  corporation  is  derived  from  sources  in 
a  Possession  of  the  United  States. 

^^  *i^4-^¥"^^  ^^  ^^^^  ^"  deductions  allowed  to  corporations, 
^?  7^*1.  P^^^  ^y  ^^"^^  °^  «*^«r  corporations  for  their 
stockho  ders,  as  a  state  method  of  collection  of  tax  from  such 
stockholders,  is  permitted  to  be  deducted  by  the  corporation, 
unless  the  bank  or  other  corporation  making  such  payment 
of  tax,  is  reimbursed  by  the  stockholder  for  the  tax  paid. 

13  The  method  of  determining  the  amount  of  foreign  tax 
paid  which  may  be  deducted  as  a  credit  against  United 
States  tax  is  similar  to  that  provided  in  the  case  of  indi- 
viduals. 

14  The  provision  for  consolidated  returns  gives  to  corpora- 
tions afniiated  within  the  meaning  of  that  provision  an 
option  of  electing  on  or  after  January  1,  1922,  whether  they 
will  make  a  consolidated  return  or  separate  returns  the 
election  once  exercised  to  be  binding  for  future  returns. 

15  A  new  plan  is  provided  for  the  taxation  of  income  of 
insurance  companies. 

Administratiye  Provisions 

16  Some  amendment  has  been  made  in  the  administrative 
provisions  of  the  law  seeking  to  give  relief  in  cases  of  addi- 
tional assessment,  in  allowing  interest  on  refunds  in  certain 
cases,  and  for  other  purposes. 

Excess  Profits  Tax 

17  The  applicable  provisions  of  the  Revenue  Act  of  1918 
for  war-profits  tax  and  excess-profits  tax  are  continued  in 
the  Act  of  1921.     That  is  to  say,  the  provisions  of  the  Reve- 


nue Act  of  1921  for  war-profits  and  excess-profits  tax  are 
those  of  the  Revenue  Act  of  1918,  with  merely  the  elimination 
of  rates  "applicable  to  prior  years  and  other  provisions  which 
have  already  expired." 

18  The  excess-profits  tax  is  repealed  as  of  January  1,  1922. 

19  Corporations  required  to  pay  an  excess-profits  tax  for 
1921  will,  therefore,  have  recourse  to  those  provisions  of 
Regulations  45  which  would  have  applied  to  the  Act  of  1918. 

DIGEST  OF  INCOME  TAX 

Income  Tax 

20  The  Federal  Income  Tax  is  an  annual  impost  or  levy  by 
the  United  States  Government  of  certain  specified  rates  of 
tax  on  a  sum  designated  as  "net  income." 

Sources  of  the  Tax 

21  Authority  for  this  levy  for  1921  and  subsequent  years, 
until  repealed,  is  the  Revenue  Act  of  1921  adopted  3:55  p.  m., 
November  23,  1921,  and  made  effective  for  taxation  of  income 
as  at  January  1, 1921. 

To  Whom  the  Tax  Applies 

22  This  tax  applies  to  the  income  of  individuals,  estates 
or  trusts  and  to  all  corporations  not  exempt  under  the  law. 

23  The  individuals  whose  income  is  thus  taxed,  are  citi- 
zens of  the  United  States,  wherever  residing,  aliens  resident 
in  the  United  States  and  non-resident  aliens  receiving  in- 
come from  certain  sources  in  the  United  States. 

The  Kinds  of  Tax 

24  Normal  Tax  and  surtax  upon  the  income  of  individuals, 
and  estates  or  trusts. 

25  Income  tax  (and  excess-profits  tax  and  war-profits  tax 
for  1921)  upon  the  income  of  corporations,  domestic  and 
foreign. 

Section  210— 

"there  shall  be  levied,  collected,  and  paid  for  each  tax- 
able year  upon  the  net  income  of  every  individual  a 
normal  tax  of  8  per  centum  of  the  amount  of  the  net 


i 


28 


Income  Tax 


Income  Tax 


29 


2$     (2) 


United  States  the  rate  uponfhe%;S^|°  °[/«f  ^ent  °*  *^« 
amount  shall  be  4  per  centum  "  '  ^  '"'•'  ^^'^^^^ 

Section  211 

tws  'lct:fhe;:"s£?beT'H*^^^''°^^''  ^'^  -«<"«  210  of 

taxable  .ear  uyntltttelet^r^rdSaS  ^'^ 

abJve^  Ssifn  '*  -li^  ?''"  '=*"*""'  °"  **>«  «'«'  $1,000 
stet,?of  *9  nnn"^'**!.  """«  ^''adations  practk-ali;  in 

by  which  the"  !r^'  *°  ''  P'""  '=^"^'""  °f  the  amoui? 
Zreafter"'«"f  "'/""■  ^''f '  ^'^  ^^^^  <=*I«dar  year 
abfve^'$6  oTo  V^^  -P"  "'"'•""  °^  t''^  ^^st  $4,000 

.  tt%r?2yoorh;r6^  /e^s-  ^^^  <- 

by  which  fhp  n^f  ^  ^     centum  of  the  amount 

tlble  lif  of^agS  92-937  ""        '^'""'"°°-     ^'"^ 

Partnerships  and  Personal  Service  Corporations 
Section  218 — 

by  personal  ser^cTinoratin^,  ?/";"^*'  *"  ""^  ""'^«d 
shall  be  taxed  as  is  the  fncomrnf  .1^'  December  31,  1921. 
quently  the  shareholders  oTLrL^^f  '=°'-P<"-^«°ns,  conse- 

si".r/ais.  ■•-»="' "-.^^^^^^^^ 

s.X\%'srJ  s-rssnr  rA.\»s: 


corporation  shall  be  prorated  between  those  years  according 
to  the  percentage  that  the  part  of  the  fiscal  year  falling 
within  a  calendar  year  is  of  12  months.  The  shareholders 
shall  be  taxed  as  though  members  of  a  partnership  for  all 
of  the  1921  income  of  the  corporation. 

32  Because  of  the  reasoning  of  the  Supreme  Court  of  the 
United  States,  in  connection  with  its  decision  on  the  "stock 
dividend"  case,  doubt  arose  as  to  the  correctness  of  this 
provision  of  law.  With  this  in  mind  the  Congress  provided 
in  section  1332  Revenue  Act  of  1921  for  such  a  contingency. 
By  this  provision,  if  by  a  final  judicial  adjudication  the 
method  of  taxing  the  income  of  personal  service  corporations 
from  1918  to  1921  inclusive  is  declared  invalid,  then  such 
income  shall  be  taxed  as  the  income  of  other  corporations  is 
taxed,  and  the  shareholders  of  such  personal  service  cor- 
porations may  make  claim  for  refund  of  the  tax  they  have 
paid ;  Provided,  That  a  personal  service  corporation  of  which 
no  shareholder  or  member  has  filed  such  a  claim  within  six 
months  next  after  such  final  decision  shall  not  be  subject  to 
taxation  on  its  said  income. 

Estates  and  Trusts 
Section  219— 

33  "That  the  tax  imposed  upon  the  net  income  of  indi- 
viduals shall  apply  to  the  income  of  estates  or  trusts  or 
any  kind  of  property  held  in  trust,  including: 

34  (1)     Income   received  by  estates   of   deceased   persons 

during  the  period  of  administration  or  settlement 
of  the  estate; 

35  (2)     Income  accumulated  in  trust  for  the  benefit  of  an 

unborn  or  unascertained  person  or  persons  with 
contingent  interests; 

36  (3)     Income  held  for  future  distribution  under  the  terms 

of  the  will  or  trust;  and 

37  (4)     Income  which  is  to  be  distributed  to  the  benefi- 

ciaries periodically,  whether  or  not  at  regular  in- 
tervals, and  the  income  collected  by  a  guardian  of 
an  infant  to  be  held  or  distributed  as  the  court 
may  direct." 


o 


80 


Income  Tax 


Income  Tax 


SI 


40     (b) 


Corporation  Income  Tax 
Section  230— 

-including  insurance  comninT.t''  '=°'P°'-^"°n  (""t  exempt) 

of  sections  243  to  alHSc  a?  tL^fn?,'"'^' •  ^  *°  *^*'  provisions 
39     Cni     1?      .,  ,^^  ^'^  "*«  following  rates : 

39     (a)     For  the  calendar  year  1921,  10  per  centum  of  fh- 
amount  of  the  net  income  in  excess  of  fhT      ^-^ 
provided  in  section  236-  and  ^'^'^^ 

Phes  to  the  income  of  corpoSions.  'ItA^Tnl^^S?^ 
Corporations-Excess  Profits  and  War  Profits  Tax 
Section  301— 

""    ttrrshin  b*:  levlefcdlS^I  ™r ^"^  ^^  ^^'^  ^-^t. 
endar  year  1921   „tl'  '=°"*'=*«'J  ^"d  Paid  for  the  cal- 

Poratifte'xJfS  cSora^ttr  aSTnS  i=e7^- 
1921  of  more  than   «J;innnn  *    **''"*«^  ner  income  for 

tract  or  conlS  Sf  Lt en 'ju^TTbTv  ^"'l,- 
November  11    iqir    o„j  "'•^"een  Juiy  6,   1917,  and 

of  $3,000  and  under    which  TT*'''"'   ^"^   '""^'''^^^ 
excess  profits  tax(^»f.^  .  ^       ^'^  "°*  "*''■«  to 

lowing:  •*  *  ^^'^  *^""'  *°  *^^  «"•«  of  the  fol- 

43  First  Bracket— 

e«e's7o7?irexls'proTtrc"*Hl  *.!j\"^*  '--«  '» 

section  312)%;'dnotTn  excels  of  20*n'™'"'''.  ""''^^ 
the  invested  capital;  P**"  '«"'"«  of 

44  Second  Braclcet 

Sce'sYor2?p^°'ent'irtr  ■"'  't'  "^*  '-o-*  ^n 
^u  per  centum  of  the  invested  capital. 

45  Government  contract  income  in   iq9i    • 

excess  proms  tax  at  30^  irifhT^^  '^  ^"^J®^*  to  an 

second  bracket,  or  to  a  war  excel  n.^'f?.'^'*  ^"^  ^^-  ^^  ^he 

w  a  war  excess  profits  tax  of  80%  of  the 


amount  of  the  net  income  in  excess  of  the  war  profits  credit, 
whichever  of  the  two  war  taxes  is  the  higher.  For  war 
excess  profits  tax,  it  is  necessary  to  refer  to  the  Revenue 
Act  of  1918  and  Regulations  thereunder. 

46  Section  302  of  the  Act  provides  a  maximum  tax  for  cor- 
porations. This  tax  most  often  applies  to  corporations  with 
capitals  from  $25,000  to  $100,000  and  net  incomes  ranging 
in  excess  of  28%  to  19%  of  these  capitals. 

Difference  in  Rates  of  Tax 

47  No  change  has  been  made  in  the  rate  of  normal  tax  on 
the  income  of  individuals.  This  remains  at  8%  flat,  with  a 
provision  that  in  the  case  of  citizens  and  resident  aliens, 
the  rates  shall  be  reduced  to  4  per  centum  on  the  first  $4,000 
above  specific  exemptions  and  credits. 

48  There  was  no  change  as  between  the  surtax  for  1918 
and  subsequent  years  under  the  Revenue  Act  of  1918.  Under 
the  Revenue  Act  of  1921,  a  slight  change  is  made  in  the  surtax ; 
for  1921,  the  surtax  rates  are  the  same  as  under  the  Act  of 
1918,  being  graded  up  to  $1,000,000.  For  1922  and  there- 
after, the  surtax  is  slightly  changed  in  gradations  and  rates 
and  becomes  a  flat  tax  of  50%  at  $200,000.  The  rate  at 
$200,000  under  the  Act  of  1918,  and  for  1921  under  the  Act 
of  1921,  was  and  is  56%. 

What  Is  Taxed 

49  The  thing  that  is  taxed  is  income.  Not  all  income  is  of 
a  taxable  class.  Income  which  is  of  a  taxable  class  is  to  be 
reported  gross.  The  statute  specifies  certain  expenditures 
or  disbursements  which  may  be  used  as  a  set  off  against 
gross  income.  These  set-offs  are  termed  "deductions."  The 
difference  between  total  gross  income  of  a  taxable  class  and 
total  allowable  deductions,  is  termed  "net  income."  The 
tax  is  applied  to  net  income. 

Definition  of  Income 

50  Income  is  the  flow  of  capital's  service ;  what  one's  capital 
does  for  him ;  and  is  not  necessarily  synonymous  with  receipt. 
Receipt  basis  is  the  general  rule  for  Income  Tax  purposes, 
however.    Except   where   the   books   of    account   are    con- 


\Kt 


\ 


ri 


32 


Income  Tax 


««H  a  il  ^^  '"  a  manner  so  as  to  make  a  different  showing 
and  a  showing  which  will  adequately  and  correctly  reflect 
income   receipt  basis  is  to  be  used,  particularly  for  the  pur 

ga  n  or  nrnfi"?  r"^  X^''"  ""'"*  '"^^^"'^  '"  determinTg 
^tlm   \J^  f°u    *''*'   ^"■■P''^®   »f  ascertaining  gain   or 

profit,  there  must  be  a  realization  of  value  through  some 

gain  or  ZlT  %'r^''''<'  «»d  <^''>se6  transaction,  fnwhiTh 
gain  or  profit  will  be  measured. 

Snm^enfjr'l'h^  '^  *  *'"^'*'?"  °*  '«'^*'  ^"^  «««h"  the  Gov- 

the"n?ries  on  th/h^'^v^"/  ''  ^""''  ^^  ^°°^  «"*"««  ^here 
tne  entries  on  the  books  do  not  correctly  state  the  facts. 

f,^  nn^^nif/*'?;''*  V^  ^^  ^'^  "^^P'*^'-  but  in  such  event  there 
IS  no  subtraction  of  capital  from  receipt  for  the  DurDosrof 
ascertaining  "gain  or  profit."  In  such  case,  the  enWre  re- 
ceipt has  the   characteristic   of  compensation   or   price   of 

ofTncoVe"'  "  '''"'"^  '°  "'  ^"'='"''«^'  «--'  in  theieturn 

53  Disservice  is  a  negative  service.     A  flow  of  disserviVp 
or  negative  income  is  called  outgo.    The  difflrence  between 
service  and  disservice  is,  therefore,  to  be  designated  neUn 
come,  but  net  income  for  the  purpose  of  the  Income  Tax  ?s 
not  necessarily  the  true  net  income  either  of  anTndividua 
or  an  enterprise.  ^"uiviauai 

54  Gross  income  as  defined  by  the  Act  of  1921  includes- 
Section  213 — 

(a)     Gains,    profits    and    income    derived    from    salaries 
wages    or    compensation    for    personal    service,*   of 


the'p^'eslTem'of^'h^luni^ed^'s^^^^^^^^^^  paid   to 

United  States,  etc..  shall  nSt  be  increased  nr^Hi„"f  fHf  Supreme  Court  of   the 
which    they  were  elected   or   appointed       Th^^iVm^^^^  term  tot 

States  has  held  that  an  Income  tav  in xr  VLtsP^"'^®  Court  of  th«  United 
such  a  term  would  serve  to  ?Xce  the  ?c7mS?ion^fi1r"/^^  the  pendency 'of 
of  the  term,  and  was  therefore  unconstUuf^ona?  a^T^^**  ^^  ^^  ^^^  bejrinning 
the  beginning  of  such  a  term  would  rnnWtninni^oJ"''®'"^  If"^  *"  effect  at 
exception  of  those  officials  of  the  TTnufrt^tlfo!"^*^  compensation.  With  the 
as  being  exempt  as  hereinbefo  I  ?ta  ed  thf  tnooS.^f 'n?^  ?  ^S,^  C(»nstitutlon 
""'The  Ay^'f^?'o\'^  ^*'^^r  '«  «ub/e'et1o  hicomrtaS.°'  ^"  °^^^"  ^"^^™- 
empTSyee^'s'as'followsf'"^''""  '^^  ^^^  ^^^^^^'^  «^  '^^ome  of  its  officials  and 

con;?;SKtro^nTo^r  Ire^r'sl^aVsTvTcl 'JiTllf  J^eSdTn'f "o^f^^^^f^f  ".^ 

any  political  subdivision  thereof    orVe  nt-t .Mot  ^f^^i^^^^^^^^*" 
compensation  received  as  such?"  Di»tilct  of  Columbia,  the 


Income  Tax 


SS 


(b) 
(c) 

(d) 

(e) 


whatever  kind  and  in  whatever  form  paid, 
From  professions,  vocations,  trades,  businesses,  com- 
merce, or 

Sales,  or  dealings  in  property,  whether  real  or  per- 
sonal, growing  out  of  the  ownership  or  use  of  or 
interest  in  such  property; 

Also  from  interest,  rent,  dividends,  securities,  or  the 
transaction  of  any  business  carried  on  for  gain  or 
profit,  or 

Gains,  or  profits,  and  income  derived  from  any  source 
whatever. 

^^,  J^^  ^"^,^"«^^oj^  a"  such  items  [except  as  provided  in 
subdivision  (e)  of  Section  201]  shall  be  included  in  the  gross 
income  for  the  taxable  year  in  which  received  by  the  tax- 
payer, unless  under  methods  of  accounting  permitted  under 
subdivision  (b)  of  section  212,  any  such  amounts  are  to  be 
properly  accounted  for  as  of  a  diflTerent  period. 
56  Subdivision  (e)  of  section  201  provides  that  dividends 
shall  be  included  m  returns  of  income  of  stockholders  for  the 
taxable  period  in  which  the  "cash  or  other  property  is 
unqualifiedly  made  subject  to  their  demands."  It  might  be 
possible,  therefore,  that  dividends  would  have  been  ac- 
counted for  in  some  year  other  than  that  in  which  received 


^     I     ^       Income  Not  Taxable 


57  Gross  income  does  not  include  the  following  items,  which 
shall  be  exempt  from  taxation  under  this  title : 

58  (1)     The  proceeds  of  life  insurance  policies  paid  upon 

the  death  of  the  insured ; 


59     (2) 


60     (3) 


61     (4) 


The  amount  received  by  the  insured  as  a  return 
of  premium  or  premiums  paid  by  him  under  life 
insurance,  endowment,  or  annuity  contracts,  either 
during  the  term  or  at  the  maturity  of  the  term 
mentioned  in  the  contract  or  upon  surrender  of 
the  contract; 

The  value  of  property  acquired  by  gift,  bequest, 
devise  or  descent  (but  the  income  from  such  prop' 
erty  shall  be  included  in  gross  income) ; 
Interest  upon — 

(a)  the  obligations  of  a  State,  Territory,  or  any 


34 


Income  Tax 


Income  Tax 


35 


political  subdivision  thereof,  or  the  District 
of  Columbia;  or 

(b)  securities  issued  under  the  provisions  of  the 
Federal  Farm  Loan  Act  of  July  17,  1916;  or 

(c)  the  obligations  of  the  United  States  or  its 
possessions;  or 

(d)  bonds  issued  by  the  War  Finance  Corpora- 
tion. In  the  case  of  obligations  of  the 
United  States  issued  after  September  1,  1917 
(other  than  postal  savings  certificates  of  de- 
posit), and  in  the  case  of  bonds  issued  by  the 
War  Finance  Corporation,  the  interest  shall 
be  exempt  only  if  and  to  the  extent  provided 
in  the  respective  Acts  authorizing  the  issue 
thereof  as  amended  and  supplemented,  and 
shall  be  excluded  from  gross  income  only  if 
and  to  the  extent  it  is  wholly  exempt  to  the 
taxpayer  from  income,  war-profits  and  ex- 
cess-profits taxes; 

«2  (5)  The  income  of  foreign  governments  received  from 
investments  in  the  United  States  in  stocks,  bonds, 
or  other  domestic  securities,  owned  by  such  foreign 
governments,  or  from  interest  on  deposits  in  banks 
m  the  United  States  of  moneys  belonging  to  such 
foreign  governments,  or  from  any  other  source 
within  the  United  States; 

fi3  (6)  Amounts  received,  through  accident  or  health  in- 
surance or  under  workmen's  compensation  acts,  as 
compensation  for  personal  injuries  or  sickness, 
plus  the  amount  of  any  damages  received  whether 
by  suit  or  agreement  on  account  of  such  injuries 
or  sickness; 

«4  (7)  Income  derived  from  any  public  utility  or  the  exer- 
cise of  any  essential  governmental  function  and 
accruing  to  any  State,  Territory,  or  the  District 
of  Columbia,  or  any  political  subdivision  of  a  State 
or  Territory,  or  income  accruing  to  the  Government 
of  any  possession  of  the  United  States,  or  any 
political  subdivision  thereof. 

Whenever  any  State,  Territory,  or  the  District 
of  Columbia,  or  any  political  subdivision  of  a  State 


1». 


or  Territory,  prior  to  September  8,  1916,  entered 
in  good  faith  into  a  contract  with  any  person,  the 
object  and  purpose  of  which  is  to  acquire,  con- 
struct, operate,  or  maintain  a  public  utility,  no  tax 
shall  be  levied  under  the  provisions  of  this  title 
upon  the  income  derived  from  the  operation  of 
such  public  utility,  so  far  as  the  payment  thereof 
will  impose  a  loss  or  burden  upon  such  State,  Ter- 
ritory, District  of  Columbia,  or  political  subdivi- 
sion; but  this  provision  is  not  intended  and  shall 
not  be  construed  to  confer  upon  such  person  any 
financial  gain  or  exemption  or  to  relieve  such  per- 
son from  the  payment  of  a  tax  as  provided  for  in 
this  title  upon  the  part  or  portion  of  such  income 
to  which  such  person  is  entitled  under  such  con- 
tract ; 

65  (8)     The  income  of  a  non-resident  alien  or  foreign  cor- 

poration which  consists  exclusively  of  earnings  de- 
rived from  the  operation  of  a  ship  or  ships,  docu- 
mented under  the  laws  of  a  foreign  country  which 
grants  an  equivalent  exemption  to  citizens  of  the 
United  States  and  to  corporations  organized  in 
the  United  States; 

66  (9)     Amounts  received  as  compensation,  family  allot- 

ments and  allowances  under  the  provisions  of  the 
War  Risk  Insurance  and  the  Vocational  Rehabilita- 
tion Acts,  or  as  pensions  from  the  United  States  for 
service  of  the  beneficiary  or  another  in  the  mili- 
tary or  naval  forces  of  the  United  States  in  time 
of  war; 

67  (10)     So  much  of  the  amount  received  by  an  individual 

after  December  31,  1921,  and  before  January  1, 
1927,  as  dividends  or  interest  from  domestic  build- 
ing and  loan  associations,  operated  exclusively  for 
the  purpose  of  making  loans  to  members,  as  does 
not  exceed  $300; 

68  (11)     The  rental  value  of  a  dwelling  house  and  appur- 

tenances thereof  furnished  to  a  minister  of  the 
gospel  as  part  of  his  compensation. 

69  (12)     The  receipts  of  shipowners'  mutual  protection  and 

indemnity  associations,  not  organized  for  profit. 


ae 


Income  Tax 


Income  Tax 


37 


70     (c) 


and  no  part  of  the  net  earnings  of  which  inures  to 
the  benefit  of  any  private  stockholder  or  member, 
but  such  corporations  shall  be  subject  as  other 
persons  to  the  tax  upon  their  net  income  from 
interest,  dividends  and  rents. 

In  the  case  of  a  non-resident  alien  individual,  gross 
income  means  only  the  gross  income  from  sources 
within  the  United  States,  determined  under  the 
provisions  of  Section  217. 


Income  of  Corporations 
Section  233— 

71  (a)     That  in  the  case  of  a  corporation  subject  to  the  tax 

imposed  by  section  230  the  term  "gross  income" 
means  the  gross  income  as  defined  in  sections  213 
and  217,  except  that  mutual  marine  insurance  com- 
panies shall  include  in  gross  income  the  gross 
premiums  collected  and  received  by  them  less 
amounts  paid  for  reinsurance. 

72  (b)     In  the  case  of  a  foreign  corporation,  gross  income 

means  only  gross  income  from  sources  within  the 
United  States,  determined  (except  in  the  case  of 
insurance  companies  subject  to  the  tax  imposed  by 
section  243  or  246)  in  the  manner  provided  in 
section  217. 

DEDUCTIONS 
Section  214 — Individuals 

73  The  following  deductions  are  permitted  to  individuals, 
when  they  actually  have  any  of  them,  or  some  or  all  of  them: 


74     (a)     "(1) 


All  the  ordinary  and  necessary  expenses  paid 
or  incurred  during  the  taxable  year  in  carry- 
ing on  any  trade  or  business,  including  a 
reasonable  allowance  for  salaries  or  other 
compensation  for  personal  services  actually 
rendered;  traveling  expenses  (including  the 
entire  amount  expended  for  meals  and  lodg- 
ing) while  away  from  home  in  the  pursuit 
of  a  trade  or  business ;  and  rentals  or  other 
payments  required  to  be  made  as  a  condition 


75     "(2) 


76     "(3) 


77 


f 


78 


79 


80 


to  the  continued  use  or  possession,  for  pur- 
poses of  the  trade  or  business,  of  property 
to  which  the  taxpayer  has  not  taken  or  is  not 
taking  title  or  in  which  he  has  no  equity." 

There  is  a  deduction  here  not  before  given 
to  persons  traveling  on  business. 

All  interest  paid  or  accrued  within  the  taxable 
year  on  indebtedness,  except  on  indebtedness  in- 
curred or  continued  to  purchase  or  carry  obliga- 
tions or  securities  (other  than  obligations  of  the 
United  States  issued  after  September  24, 1917,  and 
originally  subscribed  for  by  the  taxpayer)  the 
interest  upon  which  is  wholly  exempt  from  taxa- 
tion under  this  title." 

The  amendment  of  previous  law  consists  in 
limiting  deductible  interest  paid  on  indebtedness 
to  purchase  Government  Bonds  to  such  as  were 
originally  subscribed  for  by  the  taxpayer. 

Taxes  paid  or  accrued  within  the  taxable  year, 
except — 

(a)  income,  war-profits,  and  excess-profits 
taxes  imposed  by  the  authority  of  the 
United  States, 

(b)  so  much  of  the  income,  war-profits  and 
excess-profits  taxes,  imposed  by  the  au- 
thority of  any  foreign  country  or  posses- 
sion of  the  United  States,  as  is  allowed 
as  a  credit  under  section  222, 

(c)  taxes  assessed  against  local  benefits  of  a 
kind  tending  to  increase  the  value  of  the 
property  assessed,  and 

(d)  taxes  imposed  upon  the  taxpayer  upon  his 
interest  as  shareholder  or  member  of  a 
corporation,  which  are  paid  by  the  cor- 
poration without  reimbursement  from  the 
taxpayer.  For  the  purpose  of  this  para- 
graph, estate,  inheritance,  legacy  and  suc- 
cession taxes  accrue  on  the  due  date 
thereof  except  as  otherwise  provided  by 


88 


Income  Tax 


Income  Tax 


39 


the  law  of  the  jurisdiction  imposing  such 

taxes." 

The  change  here  is  the  taking  away 
from  individtcals  the  deduction  for  tax 
paid  on  bank  shares,  etc.,  and  giving  this 
deduction  to  corporations  paying  the  tax, 
unless  the  shareholder  reimburses  the 
corporation,  in  which  event  there  would 
be  no  advantage  to  the  shareholder,  and 
in  permitting  a  deduction  for  estate  or 
inheritance  taxes  which  have  o/icmed  or 
been  paid, 

81  "(4)    Losses  sustained  during  the  taxable  year  and  not 

compensated  for  by  insurance  or  otherwise,  if  in- 
curred in  trade  or  business. 

This  refers  to  inventory  or  operating  loss, 

82  "(5)     Losses  sustained  during  the  taxable  year  and  not 

compensated  for  by  insurance  or  otherwise,  if 
incurred  in  any  transaction  entered  into  for  profit, 
though  not  connected  with  the  trade  or  business; 
but  in  the  case  of  a  non-resident  alien  individual 
only  if  and  to  the  extent  that  the  profit,  if  such 
transaction  had  resulted  in  a  profit,  would  be  tax- 
able under  this  title.  No  deduction  shall  be  al- 
lowed under  this  paragraph  for  any  loss  claimed 
to  have  Iseen  sustained  in  any  sale  or  other  dis- 
position of  shares  of  stock  or  securities  made  after 
the  passage  of  this  Act  where  it  appears  that 
within  thirty  days  before  or  after  the  date  of 
such  sale  or  other  disposition  the  taxpayer  has 
acquired  (otherwise  than  by  bequest  or  inherit- 
ance) substantially  identical  property,  and  the 
property  so  acquired  is  held  by  the  taxpayer  for 
any  period  after  such  sale  or  other  disposition. 
If  such  acquisition  is  to  the  extent  of  part  only 
of  substantially  identical  property,  then  only  a 
proportionate  part  of  the  loss  shall  be  disallowed." 
The  Act  of  1921  was  passed  at  S:55  p.  m,, 
November  23,  1921,  Sales  of  stock  or  securities 
completed  prior  to  the  passage  of  this  Act  are  not 
affected  by  this  paragraph.    It  has   been  held 


that  the  Law  does  not  take  notice  of  a  fraction  of 
a  day.  It  may  be  possible  that  the  Commissioner 
of  Internal  Revenue  will  take  the  view  that  the 
Act  having  been  passed  on  November  23  will 
require  that  all  of  that  day  be  considered  for  the 
purposes  of  this  provision. 

The  statute  provides  that,  where  within  30 
days  before  or  after  a  sale  of  stock  or  securities 
''substantially  identical  property*'  is  acquired  and 
held  by  the  taxpayer  for  any  period  after  such 
sale  or  other  disposition,  no  loss  determined  upon 
such  a  sale  shall  be  allowed  as  a  deduction  from 
gross  income  in  return  of  income.  As  originally 
proposed,  the  inhibition  v)as  against  the  repur- 
chase of  ''identical  or  substantially  identical** 
property.  The  Act  as  passed  omits  the  word 
"identical**  except  as  adjectively  qualified.  It  is 
to  be  presumed  that  a  repurchase  unthin  30  days 
after  sale  of  the  identical  property  sold  would  be 
covered  by  the  language  of  the  statute,  "substan- 
tially identical,'* 

"Identical** — Absolutely  the  same,  as  in  es- 
sence or  in  all  respects;  the  very  same:  opposed 
to  different,  and  contrasted  with  similar;  as,  this 
is  the  identical  volume  from  which  he  read;  the 
identical  spot. — Stand,  Die, 

Clearly  with  this  provisian,  the  sale  or  acquisi- 
tion, for  example,  of  C,  B.  &  Q.  Bonds,  Nos, 
3U,  36  First  Mortgage,  Series  "A**  5%  20-year 
Bonds  due  May  1,  1941,  would  require  acquisition 
{other  than  by  bequest  or  inheritance)  unthin  30 
days  prior  to  a  sale  by  the  purchaser  thereof  of 
bonds  of  the  same  debtor,  and  same  issue  of  the 
same  debtor,  or  a  replacement  by  purchase  within 
30  days  after  sale  of  either  the  same  certificates 
sold  or  other  certificates  of  the  same  debtor  and 
same  issue, 

A  repurchase  of  the  identical  certificates  would 
be  "identical  property,**  Purchase  of  other  certifir- 
cates  of  the  same  debtor  and  same  issue  of  su4ih 


m 


' 


40 


Income  Tax 


Income  Tax 


41 


83     "(6) 


84    "(7) 


»* 


debtor  wovXd  he  "substantially  identical  property. 

Bonds  of  some  other  debtor,  or  some  other 
issue  of  the  same  debtor,  would  be  similar,  as 
pointed  out  in  the  definition  of  "identical:'  A 
purchase  of  "similar"  property,  however,  does  not 
come  within  the  inhibition  of  the  statute. 

It  might  be  possible  where  there  was  a  holding 
of  stock  or  securities  which  were  sold,  say,  Decem- 
ber 15th,  that  a  purchase  on  November  25th  pre- 
ceding, of  substantially  identical  property,  could 
be  sold  prior  to  December  15th  following  and  a 
gam  or  loss  taken  without  affecting  the  gain  or 
loss  status  of  the  sale  on  December  15th.  Any 
of  the  purchase  on  November  25th,  held  by  the 
taxpayer  for  any  period  after  December  15th, 
would  negative  a  loss  deduction  on  a  like  amount 
of  securities  sold  December  15th. 

Losses  sustained  during  the  taxable  year  of  prop- 
erty not  connected  with  the  trade  or  business  (but 
in  the  case  of  a  non-resident  alien  individual  only 
property  within  the  United  States)  if  arising  from 
fires,  storms,  shipwreck,  or  other  casualty,  or  from 
theft,  and  if  not  compensated  for  by  insurance 
or  otherwise.  Losses  allowed  under  paragraphs 
(4),  (6)  and  (6)  of  this  subdivision  shall  be  de- 
ducted as  of  the  taxable  year  in  which  sustained 
unless,  m  order  to  clearly  reflect  the  income,  the 
loss  should,  in  the  opinion  of  the  Commissioner, 
be  accounted  for  as  of  a  different  period.  In  case 
of  losses  arising  from  destruction  of  or  damage 
to  property,  where  the  property  so  destroyed  or 
damaged  was  acquired  before  March  1,  1913,  the 
deduction  shall  be  computed  upon  the  basis  of 
its  fair  market  price  or  value  as  of  March  1,  1913." 

This  is  a  variation  of  the  rule  prescribed  in 
section  202  for  determining  loss. 

Debts  ascertained  to  be  worthless  and  charged  off 
within  the  taxable  year  (or,  in  the  discretion  of 
the  Commissioner,  a  reasonable  addition  to  a  re- 
serve for  bad  debts) ;  and  when  satisfied  that  a 
debt  IS  recoverable  only  in  part,  the  Commissioner 


>* 


may  allow  such  debt  to  be  charged  off  in  part. 

In  previous  statutes,  only  debts  actually  deter- 
mined to  be  wholly  worthless  and  actually  charged 
off  could  be  taken.  This  is  the  first  instance  in 
our  income  tax  laws  where  a  reserve  has  been  per- 
mitted as  a  deduction. 

85  *'(8)     A  reasonable  allowance  for  the  exhaustion,  wear 

and  tear  of  property  used  in  the  trade  or  busi- 
ness, including  a  reasonable  allowance  for  obso- 
lescence. In  the  case  of  such  property  acquired 
before  March  1,  1913,  this  deduction  shall  be  com- 
puted upon  the  basis  of  its  fair  market  price  or 
value  as  of  March  1,  1913: 

The  Uist  sentence  here  is  a  previous  regulation 
now  written  into  the  law. 

86  "(9)     In  the  case  of  buildings,  machinery,  equipment,  or 

other  facilities,  constructed,  erected,  installed  or 
acquired,  on  or  after  April  6,  1917,  for  the  produc- 
tion of  articles  contributing  to  the  prosecution 
of  the  war  against  the  German  Government,  and 
in  the  case  of  vessels  constructed  or  acquired  on 
or  after  such  date  for  the  transportation  of  articles 
or  men  contributing  to  the  prosecution  of  such 
war,  there  shall  be  allowed,  for  any  taxable  year 
ending  before  March  3,  1924  (if  claim  therefor 
was  made  at  the  time  of  filing  return  for  the 
taxable  year  1918,  1919,  1920,  or  1921)  a  reason- 
able deduction  for  the  amortization  of  such  part 
of  the  cost  of  such  facilities  or  vessels  as  has 
been  borne  by  the  taxpayer,  but  not  again  includ- 
ing any  amount  otherwise  allowed  under  this  title 
or  previous  Acts  of  Congress  as  a  deduction  in 
computing  net  income.  At  any  time  before  March 
3,  1924,  the  Commissioner  may,  and  at  the  request 
of  the  taxpayer  shall,  re-examine  the  return,  and 
if  he  then  finds  as  a  result  of  an  appraisal  or  from 
other  evidence  that  the  deduction  originally  al- 
lowed was  incorrect,  the  income,  war-profits,  and 
excess-profits  taxes  for  the  year  or  years  affected 
shall  be  redetermined;  and  the  amount  of  tax  due 


42 


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Income  Tax 


43 


87  "(10) 


upon  such  redetermination,  if  any,  shall  be  paid 
upon  notice  and  demand  by  the  collector,  or  the 
amount  of  tax  overpaid,  if  any,  shall  be  credited 
or  refunded  to  the  taxpayer  in  accordance  with 
the  provisions  of  section  252." 

This  paragraph  definitely  fixes  the  time  mthin 
which  war  amortization  is  to  be  completed.  The 
Government  has  heretofore  been  refusing  to  act 
finally,  except  in  the  case  of  actual  dispositim  of 
amortizable  property,  on  the  ground  that  normal 
conditions  had  not  returned. 

In  the  case  of  mines,  oil  and  gas  wells,  other 
natural  deposits,  and  timber,  a  reasonable  allow- 
ance for  depletion  and  for   depreciation  of  im- 
provements, according  to  the  peculiar  conditions 
in  each  case,  based  upon  cost,  including  cost  of 
development  not  otherwise  deducted:    Provided, 
That  in  the  case  of  such  properties  acquired  prior 
to  March  1,  1913,  the  fair  market  value  of  the 
property   (or  the  taxpayer's  interest  therein)   on 
that  date  shall  be  taken  in  lieu  of  cost  up  to  that 
date :    Provided  further,  That  in  the  case  of  mines, 
oil  and  gas  wells,  discovered  by  the  taxpayer,  on  or 
after  March  1, 1913,  and  not  acquired  as  the  result 
of  purchase  of  a  proven  tract  or  lease,  where  the 
fair  market  value  of  the  property  is  materially 
disproportionate  to  the  cost,  the  depletion  allow- 
ance shall  be  based  upon  the  fair  market  value 
of  the  property  at  the  date  of  the  discovery,  or 
within  thirty  days  thereafter:    And  provided  fur- 
ther. That  such  depletion  allowance  based  on  dis- 
covery  value   shall   not  exceed   the   net   income, 
computed  without  allowance  for  depletion,  from 
the  property  upon  which  the  discovery  is  made, 
except  where  such  net  income  so  computed  is  less 
than  the  depletion  allowance  based  on  cost  or  fair 
market  value  as  of  March  1, 1913;  such  reasonable 
allowance  in  all  the  above  cases  to  be  made  under 
rules  and  regulations  to  be  prescribed  by  the  Com- 
missioner, with  the  approval  of  the  Secretary.     In 
the  case  of  leases  the  deductions  allowed  by  this 


paragraph  shall  be  equitably  apportioned  between 
the  lessor  and  lessee." 


88  "(11) 


89  "(12) 


li. 


Contributions  or  gifts  made  within  the  taxable 
year  or  to  or  for  the  use  of: 

(a)  The  United  States,  any  State,  Territory,  or 
any  political  subdivision  thereof,  or  the 
District  of  Columbia,  for  exclusively  public 
purposes ; 

(b)  Any  corporation,  or  community  chest, 
fund,  or  foundation,  organized  and  operated 
exclusively  for  religious,  charitable,  scien- 
tific, literary,  or  educational  purposes,  in- 
cluding posts  of  the  American  Legion  or 
the  Women's  Auxiliary  units  thereof,  or 
for  the  prevention  of  cruelty  to  children 
or  animals,  no  part  of  the  net  earnings  of 
which  inures  to  the  benefit  of  any  private 
stockholder  or  individual;  or 

(c)  The  special  fund  for  vocational  rehabilita- 
tion authorized  by  section  7  of  the  Voca- 
tional Rehabilitation  Act;  to  an  amount 
which  in  all  the  above  cases  combined  does 
not  exceed  15  per  centum  of  the  tax- 
payer's net  income  as  computed  without 
the  benefit  of  this  paragraph.  In  case  of 
a  non-resident  alien  individual  this  deduc- 
tion shall  be  allowed  only  as  to  contribu- 
tions or  gifts  made  to  domestic  corpora- 
tions, or  to  community  chests,  funds,  or 
foundations,  created  in  the  United  States, 
or  to  such  vocational  rehabilitation  fund. 
Such  contributions  or  gifts  shall  be  allow- 
able as  deductions  only  if  verified  under 
rules  and  regulations  prescribed  by  the 
Commissioner,  with  the  approval  of  the 
Secretary." 

If  property  is  compulsorily  or  involuntarily  con- 
verted into  cash  or  its  equivalent  as  a  result  of — 

(a)     Its  destruction  in  whole  or  in  part, 


44 


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Income  Tax 


45 


(b)  Theft  or  seizure,  or 

(c)  An  exercise  of  the  power  of  requisition  or 
condemnation,  or  the  threat  or  imminence 
thereof;  and  if  the  taxpayer  proceeds 
forthwith  in  good  faith,  under  regulations 
prescribed  by  the  Commissioner  with  the 
approval  of  the  Secretary,  to  expend  the 
proceeds  of  such  conversion  in  the  acqui- 
sition of  other  property  of  a  character 
similar  or  related  in  service  or  use  to 
the  property  so  converted,  or  in  the  ac- 
quisition of  80  per  centum  or  more  of 
the  stock  or  shares  of  a  corporation  own- 
ing such  other  property,  or  in  the  establish- 
ment of  a  replacement  fund,  then  there  shall 
be  allowed  as  a  deduction  such  portion 
of  the  gain  derived  as  the  portion  of  the 
proceeds  so  expended  bears  to  the  entire 
proceeds.  The  provisions  of  this  para- 
graph prescribing  the  condition  under 
which  a  deduction  may  be  taken  in  re- 
spect of  the  proceeds  or  gains  derived 
from  the  compulsory  or  involuntary  con- 
version of  property  into  cash  or  its  equiv- 
alent, shall  apply  so  far  as  may  be  prac- 
ticable to  the  exemption  or  exclusion  of 
such  proceeds  or  gains  from  gross  income 
under  prior  income,  war-profits  and  excess- 
profits  tax  acts." 

Tfiis  paragraph  is  new.  It  ie  referred 
to  in  paragraph  (2)  of  subdivision  (d) 
of  section  202, 

Example : 

Where  property  converted,  a$  provided 
in  this  paragraph,  had  a  value  on  March 

1,  1913,  of,  say $100,000 

or  its  cost  subsequent  to  that  date  was 

$100,000 

and  its  value  at  conversion  was  larger 
than  this  sum,  say $150,000 


and  the  owner  undertakes  to  replace  the 
converted  property  from  this  value.  Let 
us  suppose  it  requires,  under  regulations 
prescribed  by  the  Cowmmioner. $145,000 
to   replace    the    property   convertedr—we 

would  then  have  a  gain  of $     5,000 

.96-2/3%  of  the  value  would  have  been 
used  in  replacement  and  this  proportion 
of  the  gain  would  be  an  allowable  deduc- 
tion under  this  paragraph: 

$5000  X  .96-2/3%  = $4833.33 

Taxable  for  the  year  in  which 
determined 166.67 


$5000.00 


dO  "(b)  In  the  case  of  a  nonresident  alien  individual  the 
deductions  allowed  in  subdivision  (a),  except 
those  allowed  in  paragraphs  (5),  (6),  and  (11), 
shall  be  allowed  only  if  and  to  the  extent  that 
they  are  connected  with  income  from  sources 
within  the  United  States;  and  the  proper  ap- 
portionment and  allocation  of  the  deductions 
with  respect  to  sources  of  income  within  and 
without  the  United  States  shall  be  determined  as 
provided  in  section  217  under  rules  and  regula- 
tions prescribed  by  the  Commissioner  with  the 
approval  of  the  Secretary.  In  the  case  of  a  citi- 
zen entitled  to  the  benefits  of  section  262  the 
deductions  shall  be  the  same  and  shall  be  deter- 
mined in  the  same  manner  as  in  the  case  of  a 
nonresident  alien  individual. 

Partnerships  and  Personal  Service  Corporations  (Section  218, 
Law). 

91  Have  the  same  deductions  as  individuals,  except  that 
they  are  not  permitted  to  deduct  contributions  or  gifts  for 
charitable  and  other  purposes  as  are  individuals. 
Estates  and  Trusts  (Section  219,  Law). 

92  The  net  income  of  an  estate  or  trust  is  computed  as  in 
the  case  of  a  single  individual  for  such  portion  of  the  income 
as  is  taxed  to  the  estate  or  trust,  except  in  lieu  of  the 


\\ 


46 


Income  Tax 


Income  Tax 


47 


deduction  for  contributions  or  gifts  for  charitable  purposes, 
etc.,  which,  pursuant  to  the  terms  of  the  will  or  deed  cre- 
ating the  trust,  is  during  the  taxable  year  paid  or  per- 
manently set  aside  for  the  purposes  and  in  the  manner 
specified  as  controlling  in  the  case  of  individuals. 

Deductions  Allowed  Corporations   (Section  234,  Law). 
Corporations  are  allowed  the  following  deductions: 

93  "(1)  AH  the  ordinary  and  necessary  expenses  paid  or 
incurred  during  the  taxable  year  in  carrying  on 
any  trade  or  business,  including  a  reasonable 
allowance  for  salaries  or  other  compensation  for 
personal  services  actually  rendered,  and  including 
rentals  or  other  payments  required  to  be  made 
as  a  condition  to  the  continued  use  or  possession 
of  property  to  which  the  corporation  has  not 
taken  or  is  not  taking  title,  or  in  which  it  has  no 
equity ;" 


94     "(2) 


95  "(3) 


All  interest  paid  or  accrued  within  the  taxable 
year  on  its  indebtedness,  except  on  indebtedness 
incurred  or  continued  to  purchase  or  carry  obli- 
gations or  securities  (other  than  obligations  of 
the  United  States  issued  after  September  24,  1917, 
and  originally  subscribed  for  by  the  taxpayer) 
the  "interest  upon  which  is  wholly  exempt  from 
taxation  under  this  title;" 

Limitation  of  taxable  interest,  on  indebtedness 
to  purchase  or  carry  Government  obligations,  to 
such  indebtedness  as  relates  only  to  original  pur- 
chases by  the  taxpayer,  is  new. 

Taxes  paid  or  accrued  within  the  taxable  year  ex- 
cept— 

(a)  Income,  war-profits,  and  excess-profits  taxes 
imposed  by  the  authority  of  the  United  States. 

(b)  So  much  of  the  income,  war-profits,  and  ex- 
cess-profits taxes  imposed  by  the  authority  of 
any  foreign  country  or  possession  of  the 
United  States  as  is  allowed  as  a  credit  under 
section  238,  and 


96  "(4) 


(c)  Taxes  assessed  against  local  benefits  of  a  kind 
tending  to  increase  the  value  of  the  property 
assessed.  In  the  case  of  obligors  specified  in 
subdivision  (b)  of  section  221  no  deduction 
for  the  payment  of  the  tax  imposed  by  this 
title,  or  any  other  tax  paid  pursuant  to  the 
contract  or  provision  referred  to  in  that  sub- 
division, shall  be  allowed,  nor  shall  such  tax 
be  included  in  the  gross  income  of  the  obligee. 
The  deduction  allowed  by  this  paragraph  shall 
be  allowed  in  the  case  of  taxes  imposed  upon  a 
shareholder  or  member  of  a  corporation  upon 
his  interest  as  shareholder  or  member,  which 
are  paid  by  the  corporation  without  reim- 
bursement from  the  shareholder  or  member, 
but  in  such  cases  no  deduction  shall  be  allowed 
the  shareholder  or  member  for  the  amount  of 
such  taxes.  For  the  purpose  of  this  para- 
graph, estate,  inheritance,  legacy,  and  succes- 
sion taxes  accrue  on  the  due  date  thereof  ex- 
cept as  otherwise  provided  by  the  law  of  the 
jurisdiction  imposing  such  taxes." 

The  new  provisions  under  this  paragraph 
are: 

Specific  authority  for  not  including  in 
individual  returns  of  income  amount  of  tax 
collected  from  such  individuals  at  the 
source;  the  giving  to  corporations  a  deduc- 
tion for  tax  paid  by  them,  and  not  reim^ 
bursed,  for  their  shareholders  upon  shares 
of  stock  issued  by  corporations  required  to 
collect  this  tax  at  the  source;  allowance  of 
estate,  inheritance,  legacy  and  succession 
taxes. 

Losses  sustained  during  the  taxable  year  and  not 
compensated  for  by  insurance  or  otherwise;  unless, 
in  order  to  clearly  reflect  the  income,  the  loss  should 
in  the  opinion  of  the  Commissioner  be  accounted  for 
as  of  a  different  period.  No  deduction  shall  be  al- 
lowed for  any  loss  claimed  to  have  been  sustained  in 


48 


Income  Tax 


any  sale  or  other  dispoaition  of  shares  of  stock  or 
securities  made  after  the  passage  of  this  Act  where 
it  appears  that  within  30  days  before  or  after  the 
date  of  such  sale  or  other  disposition  the  taxpayer 
has  acquired  (otherwise  than  by  bequest  or  inheri- 
tance) substantially  identical  property,  and  the  prop- 
erty so  acquired  is  held  by  the  taxpayer  for  any 
period  after  such  sale  or  other  disposition,  unless 
such  claim  is  made  by  a  dealer  in  stock  or  securities 
and  with  respect  to  a  transaction  made  in  the  ordin- 
ary course  of  its  business.  If  such  acquisition  is  to 
the  extent  of  part  only  of  substantially  identical 
property,  then  only  a  proportionate  part  of  the  loss 
shall  be  disallowed.  In  case  of  losses  arising  from 
destruction  of  or  damage  to  property,  where  the 
property  so  destroyed  or  damaged  was  acquired  be- 
fore March  1,  1913,  the  deduction  shall  be  computed 
upon  the  basis  of  its  fair  market  price  or  value  as  of 
March  1,  1913;" 

Restriction  upon  reduction  of  loss  from  sale  of 
securities  is  broader  here  than  in  paragraph  (5) 
section  214  (182)  for  individuals,  in  that,  in  this 
paragraph  corporate  dealers  in  securities  would  ap- 
pear to  be  exempt  from  this  provision  in  respect  to 
transactions  in  the  ordinary  course  of  their  busi- 
ness. 

97  "(5)    Debts  ascertained  to  be  worthless  and  charged  off 

within  the  taxable  year  (or  in  the  discretion  of  the 
Commissioner,  a  reasonable  addition  to  a  reserve  for 
bad  debts) ;  and  when  satisfied  that  a  debt  is  recov- 
erable only  in  part,  the  Commissioner  may  allow  such 
debt  to  be  charged  off  in  part;" 

Provision  for  charge-off  of  a  reserve  or  frac- 
tional loss  is  new. 

98  "(6)    The  amount  received  as  dividends — 

(a)  from  a  domestic  corporation  other  than  a 
corporation  entitled  to  the  benefits  of  section 
262,  or 

(b)  from  any  foreign  corporation  when  it  is 
shown  to  the  satisfaction  of  the  Commissioner 


Income  Tax 


49 


that  more  than  50  per  centum  of  the  gross 
income  of  such  foreign  corporation  for  the 
three-year  period  ending  with  the  close  of  its 
taxable  year  preceding  the  declaration  of  such 
dividends  (or  for  such  part  of  such  period  as 
the  foreign  corporation  has  been  in  existence) 
was  derived  from  sources  within  the  United 
States  as  determined  under  section  217." 

99  "(7)    A  reasonable  allowance  for  the  exhaustion,  wear 

and  tear  of  property  used  in  the  trade  or  business, 
including  a  reasonable  allowance  for  obsolescence. 
In  the  case  of  such  property  acquired  before  March 
1,  1913,  this  deduction  shall  be  computed  upon  the 
basis  of  its  fair  market  price  or  value  as  of  March 
1,  1913;" 

100  "(8)    In  the  case  of  buildings,  machinery,  equipment,  or 

other  facilities,  constructed,  erected,  installed,  or  ac- 
quired, on  or  after  April  6,  1917,  for  the  production 
of  articles  contributing  to  the  prosecution  of  the  war 
against  the  German  Government,  and  in  the  case  of 
vessels  constructed  or  acquired  on  or  after  such  date 
for  the  transportation  of  articles  or  men  contribut- 
ing to  the  prosecution  of  such  war,  there  shall  be 
allowed,  for  any  taxable  year  ending  before  March 
3,  1924  (if  claim  therefor  was  made  at  the  time  of 
filing  return  for  the  taxable  year  1918,  1919,  1920, 
or  1921)  a  reasonable  deduction  for  the  amortization 
of  such  part  of  the  cost  of  such  facilities  or  vessels 
as  has  been  borne  by  the  taxpayer,  but  not  again 
including  any  amount  otherwise  allowed  under  this 
title  or  previous  Acts  of  Congress  as  a  deduction  in 
computing  net  income.  At  any  time  before  March 
3,  1924,  the  Commissioner  may,  and  at  the  request 
of  the  taxpayer  shall,  re-examine  the  return,  and  if 
he  then  finds  as  a  result  of  an  appraisal  or  from 
other  evidence  that  the  deduction  originally  allowed 
was  incorrect,  the  income,  war-profits,  and  excess- 
profits  taxes  for  the  year  or  years  affected  shall  be 
redetermined  and  the  amount  of  tax  due  upon  such 
redetermination,  if  any,  shall  be  paid  upon  notice  and 
demand  by  the  collector,  or  the  amount  of  tax  over- 


n 


50 


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Income  Tax 


51 


paid,  if  any,  shall  be  credited  or  refunded  to  the  tax- 
payer m  accordance  with  the  provisions  of  section 
252;" 

This  provision  definitely  fixes  the  time  in  which 
'War  amortization  claims  may  be  settled. 

101  "(9)    In  the  case  of  mines,  oil  and  gas  wells,  other  nat- 
ural deposits,  and  timber,  a  reasonable  allowance  for 
depletion  and  for  depreciation  of  improvements,  ac- 
cording to  the  peculiar  conditions  in  each  case,  based 
upon  cost  including  cost  of  development  not  other- 
wise deducted:  Provided,  That  in  the  case  of  such 
properties  acquired  prior  to  March  1,  1913,  the  fair 
market  value  of  the  property  (or  the  taxpayer's  in- 
terest therein)  on  that  date  shall  be  taken  in  lieu 
of  cost  up  to  that  date :    Provided  further,  That  in 
the  case  of  mines,  oil  and  gas  wells,  discovered  by 
the  taxpayer,  on  or  after  March  1,  1913,  and  not  ac- 
quired as  the  result  of  purchase  of  a  proven  tract 
or  lease,  where  the  fair  market  value  of  the  property 
is  materially  disproportionate  to  the  cost,  the  deple- 
tion allowance  shall  be  based  upon  the  fair  market 
value  of  the  property  at  the  date  of  the  discovery, 
or  within  thirty  days  thereafter :  And  provided  fur- 
ther, That  such  depletion  allowance  based  on  discov- 
ery value  shall  not  exceed  the  net  income,  computed 
without  allowance  for  depletion,  from  the  property 
upon  which  the  discovery  is  made,  except  where  such 
net  income  so  computed  is  less  than  the  depletion 
allowance  based  on  cost  or  fair  market  value  as  of 
March  1,  1913;  such  reasonable  allowance  in  all  the 
above  cases  to  be  made  under  rules  and  regulations 
to  be  prescribed  by  the  Ck)mmissioner  with  the  ap- 
proval of  the  Secretary.     In  the  case  of  leases  the 
deductions    allowed    by    this    paragraph    shall    be 
equitably  apportioned  between  the  lessor  and  lessee;" 

102  "(10)  In  the  case  of  insurance  companies  (other  than  life 
insurance  companies),  in  addition  to  the  above  (un- 
less otherwise  allowed) : 

(a)  The  net  addition  required  by  law  to  be  made 
within  the  taxable  year  to  reserve  funds  (in- 


cluding in  the  case  of  assessment  insurance 
companies  the  actual  deposit  of  sums  with 
State  or  Territorial  officers  pursuant  to  law  as 
additions  to  guarantee  or  reserve  funds) ;  and 
(b)  The  sums  other  than  dividends  paid  within 
the  taxable  year  on  policy  and  annuity  con- 
tracts. After  December  31,  1921,  this  sub- 
division shall  apply  only  to  mutual  insurance 
companies  other  than  life  insurance  com- 
panies." 

103  "(11)  In  the  case  of  corporations    (except  those  taxed 

under  section  243)  issuing  policies  covering  life, 
health,  and  accident  insurance  combined  in  one  policy 
issued  on  the  weekly  premium  payment  plan  con- 
tinuing for  life  and  not  subject  to  cancellation,  in 
addition  to  the  above,  such  portion  of  the  net  addi- 
tion (not  required  by  law)  made  within  the  taxable 
year  to  reserve  funds  as  the  Commissioner  finds  to 
be  required  for  the  protection  of  the  holders  of  such 
policies  only.  This  subdivision  shall  not  be  in  effect 
after  December  31,  1921;" 

104  "(12)  In  the  case  of  mutual  marine  insurance  companies, 

there  shall  be  allowed,  in  addition  to  the  deductions 
allowed  in  paragraphs  (1)  to  (10),  inclusive,  and 
paragraph  (14),  unless  otherwise  allowed,  amounts 
repaid  to  policyholders  on  account  of  premiums  pre- 
viously paid  by  them,  and  interest  paid  upon  such 
amounts  between  the  ascertainment  and  the  payment 
thereof;" 

105  "(13)  In  the  case  of  mutual  insurance  companies    (in- 

cluding interinsurers  and  reciprocal  underwriters, 
but  not  including  mutual  life  or  mutual  marine  in- 
surance companies)  requiring  their  members  to  make 
premium  deposits  to  provide  for  losses  and  expenses, 
there  shall  be  allowed,  in  addition  to  the  deductions 
allowed  in  paragraphs  (1)  to  (10),  inclusive,  and 
paragraph  (14),  unless  otherwise  allowed,  the 
amount  of  premium  deposits  returned  to  their  policy- 
holders and  the  amount  of  premium  deposits  retained 
for  the  payment  of  losses,  expenses,  and  reinsurance 
reserves;" 


52 


Income  Tax 


Income  Tax 


&3 


106  "(14)  If  property  is  compulsorily  or  involuntarily  con- 
verted into  cash  or  its  equivalent  as  a  result  of — 

(a)  Its  destruction  in  whole  or  in  part, 

(b)  Theft  or  seizure,  or 

(c)  An  exercise  of  the  power  of  requisition  or 
condemnation,  or  the  threat  or  imminence 
thereof;  and  if  the  taxpayer  proceeds  forth- 
with in  good  faith,  under  regulations  pre- 
scribed by  the  Commissioner  with  the  ap- 
proval of  the  Secretary,  to  expend  the  pro- 
ceeds of  such  conversion  in  the  acquisition  of 
other  property  of  a  character  similar  or  re- 
lated in  service  or  use  to  the  property  so  con- 
verted, or  in  the  acquisition  of  80  per  centum 
or  more  of  the  stock  or  shares  of  a  corporation 
owning  such  other  property,  or  in  the  estab- 
lishment of  a  replacement  fund,  then  there 
shall  be  allowed  as  a  deduction  such  portion 
of  the  gain  derived  as  the  portion  of  the  pro- 
ceeds so  expended  bears  to  the  entire  pro- 
ceeds. The  provisions  of  this  paragraph  pre- 
scribing the  conditions  under  which  a  deduc- 
tion may  be  taken  in  respect  of  the  proceeds 
or  gains  derived  from  the  compulsory  or  in- 
voluntary conversion  of  property  into  cash  or 
its  equivalent,  shall  apply  so  far  as  may  be 
practicable  to  the  exemption  or  exclusion  of 
such  proceeds  or  gains  from  gross  income  un- 
der prior  income,  war-profits,  and  excess- 
profits  tax  Acts."     (See  189.)" 


Section  215— 

(a) 

107 
108 


ITEMS  NOT  DEDUCTIBLE 

That  in  computing  net  income  no  deduction 
shall  in  any  case  be  allowed  in  respect  of — 

(1)  Personal,  living,  or  family  expenses; 

(2)  Any  amount  paid  out  for  new  buildings 
or  for  permanent  improvements  or  better- 
ments made  to  increase  the  value  of  any 
property  or  estate; 


109 


110 


111 


(b) 


(3) 


(4) 


Any  amount  expended  in  restoring  prop- 
erty or  in  making  good  the  exhaustion 
thereof  for  which  an  allowance  is  or  has 
been  made,  or 

Premiums  paid  on  any  life  insurance 
policy  covering  the  life  of  any  officer  or 
employee,  or  of  any  person  financially  in- 
terested in  any  trade  or  business  carried 
on  by  the  taxpayer,  when  the  taxpayer  is 
directly  or  indirectly  a  beneficiary  under 
such  policy. 

Amounts  paid  under  the  laws  of  any  State, 
Territory,  District  of  Columbia,  possession  of 
the  United  States,  or  foreign  country  as  income 
to  the  holder  of  a  life  or  terminable  interest 
acquired  by  gift,  bequest,  or  inheritance  shall 
not  be  reduced  or  diminished  by  any  deduction 
for  shrinkage  (by  whatever  name  called)  in 
the  value  of  such  interest  due  to  the  lapse  of 
time,  nor  by  any  deduction  allowed  by  this  Act 
for  the  purpose  of  computing  the  net  income 
of  an  estate  or  trust  but  not  allowed  under  the 
laws  of  such  State,  Territory,  District  of  Col- 
umbia, possession  of  the  United  States,  or 
foreign  country  for  the  purpose  of  computing 
the  income  to  which  such  holder  is  entitled." 

This  might  refer  to  amortization  of  prem- 
iums of  investments,  depreciation  of  physi- 
cal property,  and  depletion  of  natural  re- 
sources, in  connection  with  the  principal  of  a 
trust  or  estate.  If  so,  then  the  holding 
would  he  that  a  beneficial  interest  therein 
shall  not  he  reduced  hy  means  of  any  of  these 
considerations  (as  would  be  done  were  the 
interest  not  in  trust)  unless  svjch  deduction 
as  would  he  allowable  under  this  Act  is  al- 
lowable to  such  interests  under  the  laws  of 
the  jurisdiction  under  which  the  estate  or 
trust  was  created. 

The  specific  reason  given  for  this  provi- 
sion was  stated  as  follows: 


WWiK    !!g"J^SgE:- 


54 


Income  Tax 


Income  Tax 


65 


"Under  existing  law  {Act  1918)  persons 
receiving  by  gift,  bequest  or  inheritance 
a  life  or  other  terminable  interest  in 
property  frequently  capitalized  the  ex- 
pected future  income,  set  up  the  value  of 
this  expectation  as  corpus  or  princijml, 
and  thereafter  claimed  a  deduction  for 
exhaustion  of  this  so-called  principal  on 
the  ground  that  with  the  passage  of 
time  the  "principal"  or  corpus  is  gradu- 
ally shrinking  or  wasting." 

CORPORATIONS    EXEMPT    FROM    TAXATION    UNDER 

THE  ACT: 

Section  231— 

112  "(1)  Labor,  agricultural,  or  horticultural  organizations; 

113  "(2)  Mutual  savings  banks  not  having  a  capital  stock 

represented  by  shares; 

114  "(3)  Fraternal  beneficiary-  societies,  orders,  or  associ- 

ations : 

(a)  operating  under  the  lodge  system  or  for  the 
exclusive  benefit  of  the  members  of  a  fra- 
ternity itself  operating  under  the  lodge 
system;  and 

(b)  providing  for  the  payment  of  life,  sick,  ac- 
cident, or  other  benefits  to  the  members  of 
such  society,  order,  or  association  or  their 
dependents ; 

115  "(4)  Domestic  building  and  loan  associations  substan- 

tially all  the  business  of  which  is  confined  to  mak-. 
ing    loans    to    members;    and    co-operative    banks 
without  capital   stock   organized   and   operated   for 
mutual  purposes  and  without  profit; 

116  "(5)   Cemetery  companies  owned  and  operated  exclusive- 

ly for  the  benefit  of  their  members  or  which  are 
not  operated  for  profit;  and  any  corporation  char- 
tered solely  for  burial  purposes  as  a  cemetery 
corporation  and  not  permitted  by  its  charter  to 
engage  in  any  business  not  necessarily  incident  to 
that  purpose,  no  part  of  the  net  earnings  of  which 


inures  to  the  benefit  of  any  private  stockholder  or 
individual; 

117  "(6)   Corporations,  and  any  community  chest,  fund,  or 

foundation,  organized  and  operated  exclusively  for 
religious,  charitable,  scientific,  literary,  or  educa- 
tional purposes,  or  for  the  prevention  of  cruelty  to 
children  or  animals,  no  part  of  the  net  earnings 
of  which  inures  to  the  benefit  of  any  private  stock- 
holder or  individual; 

118  "(7)  Business  leagues,  chambers  of  commerce,  or  boards 

of  trade,  not  organized  for  profit  and  no  part  of 
the  net  earnings  of  which  inures  to  the  benefit 
of  any  private  stockholder  or  individual; 

119  "(8)  Civic  leagues  or  organizations  not  organized  for 

profit  but  operated  exclusively  for  the  promotion 
of  social  welfare; 

120  "(9)  Clubs  organized  and  operated  exclusively  for  pleas- 

ure, recreation,  and  other  nonprofitable  purposes, 
no  part  of  the  net  earnings  of  which  inures  to  the 
benefit  of  any  private  stockholder  or  member; 

121  "(10)  Farmers'    or   other   mutual   hail,    cyclone,    or   fire 

insurance  companies,  mutual  ditch  or  irrigation 
companies,  mutual  or  co-operative  telephone  com- 
panies, or  like  organizations  of  a  purely  local 
character,  the  income  of  which  consists  solely  of 
assessments,  dues,  and  fees  collected  from  mem- 
bers for  the  sole  purpose  of  meeting  expenses; 

122  "(11)  Farmers',  fruit  growers*,  or  like  associations,  or- 

ganized and  operated  as  sales  agents  for  the  pur- 
pose of  marketing  the  products  of  members  and 
turning  back  to  them  the  proceeds  of  sales,  less  the 
necessary  selling  expenses,  on  the  basis  of  the 
quantity  of  produce  furnished  by  them;  or  organ- 
ized and  operated  as  purchasing  agents  for  the 
purpose  of  purchasing  supplies  and  equipment  for 
the  use  of  members  and  turning  over  such  supplies 
and  equipment  to  such  members  at  actual  cost, 
plus  necessary  expenses; 

123  "(12)  Corporations  organized  for  the  exclusive  purpose 

of  holding  title  to  property,  collecting  income  there- 


m 


I: 


56 


Income  Tax 


from,  and  turning  over  the  entire  amount  thereof, 
less  expenses,  to  an  organization  which  itself  is 
exempt  from  the  tax  imposed  by  this  title; 

124  "(13)  Federal  land  banks  and  national  farm  loan  asso- 

ciations as  provided  in  section  26  of  the  Act  ap- 
proved July  17,  1916,  entitled  "An  Act  to  provide 
capital  for  agricultural  development,  to  create 
standard  forms  of  investment  based  upon  farm 
mortgage,  to  equalize  rates  of  interest  upon  farm 
loans,  to  furnish  a  market  for  United  States  bonds, 
to  create  Government  depositaries  and  financial 
agents  for  the  United  States,  and  for  other  pur- 
poses"; 

125  "(14)  Personal   service   corporations.     This   subdivision 

shall  not  be  in  effect  after  December  31,  1921." 

RETURNS  OF  INCOME 

126  A  return  of  income  is  a  statement  "required  by  the 
Government"  of  the  total  gross  income  of  a  taxable  class 
and  such  other  information  as  may  be  called  for,  and  of 
the  several  deductions  and  the  amount  of  each,  provided 
by  the  statute  as  an  offset  against  gross  income,  and  with 
such  particulars  of  information  concerning  each  deduction 
as  may  be  called  for,  together  with  the  amount  of  personal 
exemptions  claimed,  and  such  information  as  may  be  called 
for  in  connection  with  such  claims. 

Who  Are  Required  to  Make  Returns  of  Income: 

127  Individuals,  Partnerships,  Estates  or  Trusts,  Corpora- 
tions, Withholding  Agents. 

Individuals: 

128  Make  returns  of  income  on  Form  1040A  for  incomes 
of  $5,000  and  less  for  1921  and  for  incomes  of  $6,000  and 
less  thereafter; 

129  On  Form  1040  for  incomes  in  excess  of  $5,000  for  1921 
and  in  excess  of  $6,000  for  subsequent  years.  Husband  and 
wife  having  separate  incomes  may  make  separate  returns, 
or  a  joint  return  as  they  may  elect.  If  the  separate  income 
IS  of  an  amount  sufficient  to  be  subject  to  surtax,  they 
should  make  separate  returns  of  income.    In  certain  states 


Income  Tax 


57 


having  community  property  laws,  husband  and  wife  are  per- 
mitted to  make  separate  returns  of  income  from  the  com- 
munity property.  The  income  tax  of  individuals  is  computed 
and  tax  paid  on  the  basis  shown  by  these  returns.  Individual 
income  is  subject  to  a  normal  tax  and  a  surtax,  according 
to  the  amount  thereof. 

Partnerships: 

130  Make  returns  of  income  on  Form  1065.  These  returns 
show  gross  income,  deductions,  and  net  income.  Also  the 
names  and  addresses  of  the  several  partners  and  their  re- 
spective shares  of  the  net  income,  separating  net  income 
into  its  several  classes  as  called  for  by  the  return. 

Estates  or  Trusts: 

131  Make  returns  of  income  on  Form  1041.  These  returns 
show  the  gross  income  and  deductions  of  the  estate  or  trust 
and  the  net  income.  The  names  and  addresses  of  the  several 
beneficiaries  and  the  portions  of  the  annual  net  income  to 
which  such  beneficiaries  are  entitled  and  what  portion,  if 
any,  of  such  income  is  to  be  retained  by  the  estate  or  trust, 
are  also  required  to  be  shown. 

132  The  trustee  or  fiduciary  acting  for  the  estate  or  trust 
may  also  be  required  under  certain  conditions  specified  by 
the  statute  and  regulations,  to  make  a  return  on  Form  1040A 
or  Form  1040  for  the  beneficiaries,  and  or  for  the  trust 
itself  in  case  of  retained  income  on  which  the  estate  or  trust 
is  required  to  pay  a  tax. 

133  Forms  1065  and  1041  are  information  returns  and  are 
used  in  connection  with  the  returns  of  individuals  receiving 
an  income  reported  on  these  information  Forms.  Additional 
returns  of  information  are  required  on  Forms  1098  (payments 
to  non-resident  aliens)  and  1099  for  payments  to  citizens  and 
resident  aliens. 

Corporations: 

134  Make  returns  of  income  on  Form  1120,  for  both  the 
income  tax  and  excess-profits  tax. 

Withholding  Agents: 

135  Make  returns  on  Forms  1012  and  1013  for  tax  collected 
from  interest  paid  on  bonds,  mortgages,  deeds  of  trust,  or 


58 


Income  Tax 


Income  Tax 


59 


similar  obligations  of  corporations  which  contain  a  tax  cove- 
nant.   On  Form  1042  for  all  other  tax  collected  at  the  source. 

136  Sections  of  the  Law  requiring  returns  are  221  (c)  for 
withholding  returns;  223  for  individual  returns;  224  for 
partnership  and  personal  service  corporation  returns;  225 
for  fiduciary  returns;  226  for  returns  covering  a  period 
less  than  12  months;  239  and  240  for  corporation  returns; 
256,  254  and  255  for  information  returns. 

PERIOD  COVERED  BY  RETURNS  OF  INCOME 

137  Returns  of  income  are  to  cover  a  period  of  12  months, 
except  in  cases  where  a  taxpayer  has  had  a  taxable  status 
for  less  than  12  months  at  return  time,  and  has  an  amount  of 
income  or  other  conditions  requiring  the  making  of  a  return 
of  income,  or  in  the  case  of  a  change  from  one  accounting 
period  to  another,  as  a  result  of  which  there  may  be  a  period 
of  time  less  than  12  months  for  which  return  of  income  will 
be  required. 

138  Corporations  are  required  to  make  returns  of  income 
on  the  basis  of  the  calendar  year,  unless  they  have  a  fiscal 
year  other  than  the  calendar  year. 

139  A  corporation  which  is  chartered  within  the  calendar 
year  and  does  not  establish  a  fiscal  year,  will  be  required 
to  make  a  return  of  income  as  at  the  end  of  the  calendar 
year  in  which  it  was  incorporated.  If  it  makes  returns  on 
the  basis  of  a  calendar  year  or  a  fiscal  year,  and  desires  to 
change  to  some  other  accounting  period,  by  giving  the  notice 
required  by  regulations,  it  may  make  such  change,  but  it 
will  be  required  to  make  return  of  income  for  the  time 
between  the  close  of  its  old  accounting  period  and  the  date 
designated  as  the  close  of  its  new  accounting  period;  as, 
where  a  corporation  has  been  making  returns  on  the  basis 
of  a  calendar  year  and  desires  to  have  a  fiscal  year,  say, 
beginning  July  1  and  ending  June  30,  it  would  file  with  the 
Commissioner  of  Internal  Revenue  a  notice  of  this  intention 
and  request  permission  to  make  the  change,  which  request 
must  be  filed  not  later  than  30  days  before  March  1st  next 
preceding  the  date  designated  for  close  of  the  fiscal  year  and 
upon  receiving  permission  to  make  the  change,  returns  of 
income  would  be  required  for  the  period  between  December 
31  and  June  30,  and  thereafter  returns  would  be  made  on 


the  basis  of  the  fiscal  year  covering  a  period  of  12  months. 

140  Persons  dying  within  a  calendar  year  and  having  an 
amount  of  net  income  in  excess  of  allowable  personal  ex- 
emptions at  the  time  of  death,  or  a  gross  income  of  $5,000, 
regardless  of  the  amount  of  net  income,  have  a  status  which 
makes  it  necessary  for  the  personal  representative  to  make 
a  return  of  income  for  the  decedent. 

141  The  section  of  the  Law  providing  for  returns  for  less 
than  12  months  is  section  226.  Paragraph  (c)  of  this  sec- 
tion contains  an  entirely  new  provision  for  the  computation 
of  tax  on  such  returns.    This  may  be  illustrated  as  follows: 

142  Take  the  case  of  a  married  man  living  with  wife  but 
without  other  dependents,  who  dies  March  31.  A  return  of 
income  made  for  him  by  his  executor  discloses  a  net  income 
of  $20,000  between  January  1  and  March  31,  1921. 

The  return  covers  three  months  or  l^  of  the  calendar  year. 

Applying  the  rule  under  section  226  (c)  : 

$20,000  X  12  months  -^  3  months   =   annual 

basis  of $80,000 

Less  personal  exemption   2,000 

Net  income  subject  to  tax $78,000 

Total  tax  on  this  sum 19,970 

^  of  this  sum  is  the  tax  to  be  paid 4,992.50 

Under  the   Act   of   1918  this  tax   would 

have  been $1,990.00 

The  tax  to  be  paid  under  the  Act  of  1921  is  24.96%  of  the 
net  income. 

The  tax  which  would  have  been  payable  under  the  Act 
of  1918  would  have  been  9.95%  of  the  net  income.  In  other 
words,  the  Act  of  1921  increases  the  tax  in  this  case  250%. 

In  addition  to  the  foregoing  will  come,  in  many  cases,  the 
Federal  estate  tax  and  State  inheritance  taxes. 

WHEN  RETURNS  ARE  TO  BE  FILED— TIME  AND  PLACE 

OF  FILING 

143  Returns  of  income  made  on  the  basis  of  the  calendar 
year  must  be  filed  after  December  31  of  the  year  for  which 
return  is  made,  and  not  later  than  March  15  next  following. 


|i 


60 


'■•': 


Income  Tax 


(This  includes  information  returns.) 

144  Returns  which  are  made  on  the  basis  of  the  fiscal  year 
must  be  made  after  the  close  of  such  fiscal  year,  and  not 
later  than  the  15th  day  of  the  third  month  next  following  the 
close  of  the  fiscal  year. 

145  Returns  of  income  must  be  filed  with  the  Collector  of 
Internal  Revenue  for  the  district  in  which  the  taxpayer  re- 
sides, or  has  his  principal  place  of  business,  and  if  these 
are  not  within  the  United  States,  then  with  the  Collector  of 
Internal  Revenue  at  Baltimore,  Maryland.  Returns  of  in- 
formation are  to  be  filed  with  the  Commissioner  of  Internal 
Revenue— Sorting  Division— Washington,  D.  C,  not  later 
than  March  15th. 

146  Withholding  returns  must  be  filed  not  later  than  March 
1st  and  are  to  be  filed  with  the  Collector  of  Internal  Revenue 
for  the  district  in  which  the  withholding  agent  makes  his 
return. 

147  Sections  of  the  Law  controlling  are:  227  for  individu- 
als, partnerships  and  fiduciaries;  section  241  for  corpora- 
tions; section  221  (c)  for  withholding  returns;  section  256 
and  regulations  for  information  returns. 

148  Reference  is  made  to  the  actual  forms  of  return  for 
method  of  statement  of  income  and  computation  of  tax. 

UNDERSTATEMENT  OF  INCOME 

149  Section  228  of  the  Law  provides  for  action  of  the  Col- 
lector of  Internal  Revenue  when  he  suspects  the  income  re- 
ported to  be  less  than  it  should  be. 

TAXATION  OF  INDIVIDUAL  OR  PARTNERSHIP  INCOME, 

AS  CORPORATE  INCOME 

150  Section  229  of  the  Law  provides  that  if  any  individual 
or  partnership  business  in  which  capital  is  a  material- 
income-producing  factor,  and  the  net  income  of  which  for 
the  taxable  year  1921  was  not  less  than  20%  of  its  invested 
capital  for  such  year,  the  business  may  be  incorporated  at 
any  time  before  or  on  March  23,  1922,  and  in  such  case  have 
its  net  income  for  1921  taxed  as  corporate  income.  It  is  also 
provided  that  if  this  provision  is  availed  of,  the  Capital  Stock 
Tax  shall  be  paid  by  such  taxpayer  as  though  the  corporation 
had  been  in  existence  from  and  after  January  1,  1921.     It 


Income  Tax 


61 


would  seem  that  unless  this  provision  of  Law  is  taken  ad- 
vantage of  before  March  15,  1922,  it  will  be  necessary  to 
apprise  the  Commissioner  of  Internal  Revenue  of  intention, 
and  secure  from  him  proper  action  to  obviate  penalty  for 
failure  to  file  return  in  time.  Also  that  within  a  reasonable 
time  after  incorporation,  the  capital  stock  tax  return  for 
1921  should  be  filed  and  that  tax  paid. 

TAX  ON  INCOME  OF  INSURANCE  COMPANIES 

151  Sections  242  to  247  inclusive  provide  specially  for  com- 
putation of  net  income  and  tax  on  income  of  insurance  com- 
panies. 

CREDIT    FOR   INCOME    TAX    (INCOME    EXEMPT   FROM 

TAX) 

Section  216 — Law: 

153  Individuals — For  Normal  Tax  Only— -(The  income  ex- 
empt from  surtax  is  $5,000  for  1921  and  $6,000  for  1922 
and  thereafter.)  For  the  purpose  of  computation  of  nor- 
mal income  tax,  there  shall  be  allowed  to  citizens,  resident 
aliens  and  estates  or  trusts,  as  a  credit,  an  amount  to  be 
deducted  from  the  net  income  otherwise  subject  to  the 
normal  income  tax,  the  following: 

(a)  The  amount  received  as  dividend  from  domestic 
corporations. 


154 


155 


(1)  Foreign  corporations  are  for  this  purpose 
to  be  considered  domestic  corporations,  when 
more  than  fifty  (50)  per  cent  of  their  net 
income  for  the  three  year  period  ending  with 
the  close  of  the  taxable  year  preceding  the 
declaration  of  such  dividend  (or  for  such 
part  of  such  period  as  the  corporation  has 
been  in  existence)  was  derived  from  sources 
within  the  United  States  as  determined  un- 
der the  provisions  of  Section  217  of  the  law. 
This  showing  must  be  made  in  accordance 
with  regulations  prescribed  by  the  Commis- 
sioner of  Internal  Revenue. 

(2)  Domestic  corporations  are  for  this  purpose 
to   be   considered   foreign   corporations,    if 


i 


I 


m 

I 


II 


S2 


Income  Tax 


Income  Tax 


63 


eighty  (80)  per  cent  or  more  of  their  gross 
income  from  all  sources  for  the  three-year 
period  immediately  preceding  the  close  of  the 
fiscal  year  (or  for  such  part  of  such  period 
immediately  preceding  the  close  of  such  tax- 
able year  as  may  be  applicable)  was  derived 
from  sources  within  a  possession  of  the 
United  States  (not  including  the  Virgin 
Islands) ;  and  if  also  fifty  (50)  per  cent  of 
the  said  gross  income  for  such  period  or  such 
part  of  such  r)eriod  was  derived  from  the 
active  conduct  of  a  trade  or  business  within 
a  possession  of  the  United  States  either  on 
their  o\ni  account  or  as  employee  or  agent  of 
another.  Dividends  from  this  class  of  cor- 
porations are  not  deductible  as  a  credit  in 
computing  normal  income  tax. 

156  (b)   Amounts  received  as  interest  on  obligations  of  the 

United  States  and  bonds  of  the  war  finance  corpora- 
tion, in  excess  of  allowable  exemptions  and  which  is 
included  in  taxable  gross  income  in  the  return  of  in- 
come. 

157  (c)    (1)  In  the  case  of  a  single  person,  a  personal  ex- 

emption of  $1,000. 

(2)  In  the  case  of  head  of  a  family  (an  individual 
who  actually  supports  and  maintains  in  one 
household  one  or  more  individuals  who  are  closely 
connected  with  him  by  blood  relationship,  rela- 
tionship  by  marriage,  or  by  adoption,  and  whose 
right  to  exercise  family  control  and  provide  for 
these  dependent  individuals,  is  based  upon  some 
moral  or  legal  obligation) ,  or  a  married  person  liv- 
ing with  husband  or  wife,  a  personal  exemption 
of  $2,500,  unless  the  net  income  is  in  excess  of 
$5,020.83,  in  which  event  the  personal  exemption 
shall  be  $2,000.  A  husband  and  wife  living  to- 
gether shall  receive  but  one  personal  exemption 
of  $2,500  or  $2,000,  as  the  case  may  be,  and  if 
they  make  separate  returns  of  income,  such  ex- 
emption may  be  taken  by  either  or  divided  be- 


in   such   proportion   as   they  may 


tween    them 
elect. 

158  (d)   $400  for  each  person  (other  than  husband  or  wife) 

dependent  upon  and  receiving  his  chief  support  from 
the  taxpayer,  if  such  dependent  person  is  under 
eighteen  years  of  age  or  is  incapable  of  self  support 
because  mentally  or  physically  defective. 

159  (e)   In  the  case  of  a  non-resident  alien  individual  or  an 

individual  a  citizen  of  the  United  States  who  is  en- 
titled to  the  benefits  of  Section  262  of  the  law  because 
of  income  from  within  a  possession  of  the  United 
States,  the  personal  exemption  shall  be  only  $1,000, 
and  he  shall  not  be  entitled  to  the  credit  for  de- 
pendents. 

160  (f)  The  status  of  the  taxpayer  on  the  last  day  of  the 

period  for  which  return  is  made,  determines  the 
amount  of  exemption  allowable  to  such  taxpayer  un- 
der (c),  (d)  and  (e)  herein.  An  individual  who  dies 
during  a  taxable  year  takes  exemption  according  to 
his  status  on  the  day  of  his  death.  In  such  case,  full 
credit  is  allowed  the  surviving  spouse,  if  any,  accord- 
ing to  his  or  her  status  at  the  close  of  the  period  for 
which  survivor  makes  return  of  income. 
Estates  or  trusts  required  to  make  returns  of  income 
and  pay  tax,  have  the  same  personal  exemption  as  a 
single  individual. 

CREDITS  ALLOWED  TO  CORPORATIONS  (FOR  THE  PUR- 
POSE ONLY  OF  COMPUTING  INCOME  TAX) 

161  Section  236:  In  ascertaining  the  amount  of  total  net  in- 
come to  be  subjected  to  corporation  income  tax,  there  shall 
be  allowed  as  credits  against  net  income — 

162  (a)   The  amount  received  as  interest  from  obligations  of 

the  United  States  and  bonds  issued  by  the  War 
Finance  Corporation,  in  excess  of  allowable  exemp- 
tions and  which  is  included  in  gross  income. 

163  (b)  In  the  case  of  a  domestic  corporation,  the  net  in- 

come of  which  is  $25,000  or  less,  a  specific  credit  of 
$2,000,  but  if  the  net  income  is  more  than  $25,000,  the 
tax  imposed  by  Section  230  of  the  law  shall  not  exceed 
the  tax  which  would  be  payable  if  the  $2,000  credit 
were  allowed,  plus  the  amount  of  net  income  in  excess 
of  $25,000. 


I 


«l 


I 


64 


Income  Tax 


Income  Tax 


65 


164  The  language  of  the  Statute  indicates  thai  there  is  some 
amount  in  excess  of  $25,000  the  income  tax  on  which  at 
the  rate  for  corporate  income  and  without  exemption,  will 
produce  an  amount  of  tax  eciual  to  the  sum  of  corporation 
income  tax  on  $25,000  with  exemption  of  $2,000  plus  the 
difference  between  the  unknown  sum  and  $25,000.  By 
equation,  we  find  this  sum  for  1921  to  be 

$25,222.22  @  10%  = $2,522.22 

Net   income   of    $25,000.00 

Less  specific  exemption   2,000.00 

Taxable  Income  $23,000.00 

Income  Tax  at  10%   2,300.00 

Add  difference  between 

$25,000.00  and  larger  sum 222.22 

Amount  of  tax $2,522.22 

165  For  1922  and  subsequent  years,  we  find  the  unknown 
sum  to  be — 

$25,285.71  @  121/2%  = $3,160.71 

Net  Income  of $25,000.00 

Less  personal  exemption       2,000.00 

Taxable  Income 23,000.00 

Income  Tax  @  121/2  %  =  2,875.00 

Add  difference  between 

$25,000  and  larger  sum  285.71 

Amount  of  tax 3,160.71 

166  For  1921,  corporations  are  required  to  pay  an  excess 
profits  tax  (possibly  in  some  cases,  a  war  profits  tax).  A 
question  then  arises  whether  determination  of  applica- 
bility of  the  $2,000  exemption  depends  on  the  amount  of 
net  income  to  be  taxed  for  both  income  and  excess  profits 
tax,  or  on  the  amount  of  net  income  after  credit  for  ex- 
cess profits  tax  and  other  credits  not  subject  to  income 
tax. 

The  latter  consideration  determines  the  question. 

167  It  will  be  noted  that  paragraph  (b)  of  Section  236  deals 


only  with  the  use  of  the  specific  credit  of  $2,000  for  the 
purpose  of  computation  of  income  tax. 

168  Paragraph  (c)  of  the  same  section  (omitting  details  of 
prescription  in  connection  with  the  computation  for  fiscal 
years),  provides  that  in  computing  income  tax,  the  amount 
of  any  war  profits  tax  and  excess  profits  tax  imposed  by 
the  Act  of  Congress  for  the  same  taxable  year,  shall  be 
credited  against  the  net  income  for  the  period  of  computa- 
tion. 

169  It  follows,  therefore,  that  the  amount  of  income  subject 
to  income  tax  is  the  remainder  after  credit  for  war  profits 
and  excess  profits  tax  (and  also  for  other  credits  not  sub- 
ject to  income  tax).  Therefore,  when  this  remainder  does 
not  exceed  $25,222.22  subject  to  income  tax  for  1921,  the 
$2,000  specific  credit  for  corporations  is  to  be  used  in  com- 
puting the  income  tax. 

170  While  the  excess  profits  tax  is  repealed  as  of  January  1, 
1922,  there  would  remain  certain  items  which  would  be 
included  in  gross  income,  but  which  would  not  be  subject 
to  income  tax  for  1922  and  subsequent  years.  Eliminating 
these  items  the  specific  credit  of  S2,00b  will  be  used  until 
the  amount  of  net  income  subject  to  income  tax  exceeds 
$25,285.71.  When  net  income  subject  to  income  tax  ex- 
ceeds this  sum  no  credit  of  $2,000  will  be  allowed. 

Example  with  excess  profits  tax  for  1921: 


Capital 

For  credit,  8%  of  Capital. 
Plus 


Net  Income $25,000.00 

'  $100,000.00 


Excess  Profits  Tax  Credit. 


8,000.00 
3,000.00 


$11,000.00 


Computation  of  Tax 

Income 

Credit 

Balance 

Rate 

Tax 

First  Bracket,  20%  of  capital. .  .— 
Second  Bracket,  Balance = 

$20,000.00 
5,222.22 

$11,000.00 

$9,000.00 
5,222.22 

20% 
40% 

$1,800.00 
2,088.88 

Net  Incoioa — 

$25,222.22 

$11,000.00 

$14,222  22 

Excess  Profits  Tax, 

$3,888.88 

Credit  Exceaa  Profits 

„  Tax $3,888.88 

Specific  Credit 2,000.00 

5.888.88 

Balance  subject  tc 
Income  Tax 

$19,333.34  @  10%=  Income  Tax 

$1,933.33 

fj 


n 


Total  Tax $5,822  21 


66 


Income  Tax 


Again : 


Net  Income 

$25,222.22 

$3,888.88 
2,000.00 

$25,000.00 

Credit  Excess  Profits  Tax .  . 

Specific  Exemption 

5,888.88 

5,888.88 

Remainder  Subject  to  In- 
come Tax 

$19,111.11 

$19,333.34 

Income  Tax  @  10% 

$1,911.11 
22.22 

$1,933  33 

Add  10%  of  Excess 

•   •   • 

$1,933.33 

171  It  will  be  noted  that  a  specific  exemption  of  $2,000  having 
been  allowed  against  a  remainder  of  less  than  $25,000 
after  credit  for  excess  profits  tax,  the  difference  of  $222.22 
is  not  to  be  added  to  the  tax  on  $25,000  with  an  allowance 
of  $2,000,  but  only  the  amount  of  income  tax  on  $222.22, 
or  $22.22. 

172  Differently  stated,  we  have: 


Net  Income 

$25,222.22 

Credit  of  Excess  Profits  Tax 

$25,000.00 
3,888.88 

3,888.88 

Remainder  less  than  $25,000 . 

$21,111.11 

$21,333.34 

Tax  ©10% 

$2,111.11 
22.22 

$2,133.33 

Add  Tax  on  Excess  over  $25 ,  666 . 

Less  10%  on  allowable  exemption  of 
$2,000 ^ 

$2,133.33 
200.00 

200.00 

Income  Tax 

$1,933.33 

$1,933.33 

INCOM 

E  Tax 

67 

173 

Capital  $1C 

For  credit  @  8%  of  capital 

Plus  Specific  Credit 

Excess  Profits  Credit 11 

K).000 

8,000 
3,000 

11,000 

Net  Income  $26,000.00 

™ 

Income 

Credit 

Balance 

Rate 

Tax 

First   Bracket,   20%   of 

Capital = 

Second  Bracket,  Balance. 

$20,000 
6,000 

$11,000 

$9,000 
6,000 

20% 
40% 

$1,800 
2,400 

Net  Income = 

$26,000 

$11,000 

$15,000 

$4,200 

Credit  Excess  Profits  Tax 

Balance  for  Income  Tax 

less  than  $25,222.22  = 

Use  specific  credit 

4,200 

$21,800 
2,000 

Balance  for  Income  Tax    $19 ,  800  @  10%  =  Income  Tax $1 ,  980 

174 


Total  Tax  = $6,180 

Capital  $100 ,  000        Net  Income  $50 ,  000 


For  credit  @  8%  of  capital 8,000 

Plus  Specific  Credit 3,000 

Excess  Profits  Credit $11 ,000 


First    Bracket,  20%    of 

Capital = 

Second  Bracket,  Balance , 


Credit   Excess    Profits 
Tax $13,800 


Income 

Credit 

Balance 

Rate 

Tax 

$20,000 
30,000 

$11,000 

$9,000 
30,000 

20% 
40% 

$1,800 
12,000 

$50,000 

$11,000 

$39,000 

$13,800 

Remainder  in  excess  of 

$25,222.22 $36,200  @  10%  =Income  Tax $3,620 

Total  Tax $17,420 

175  (c)  The  amount  of  any  war-profits  and  excess-profits 
taxes  imposed  by  Act  of  Congress  for  the  same  tax- 
able year.  The  credit  allowed  by  this  subdivision 
shall  be  determined  as  followi: 


f 


68 


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176 


f 


177 


(1)  In  the  case  of  a  corporation  which  makes  re- 
turn for  a  fiscal  year  beginning  in  1920  and 
ending  in  1921,  in  computing  the  income  tax  as 
provided  in  subdivision  (a)  of  section  205,  the 
portion  of  the  war-profits  and  excess-profits 
tax  computed  for  the  entire  period  under  clause 
(1)  of  subdivision  (a)  of  section  335  shall  be 
credited  against  the  net  income  computed  for 
the  entire  period  as  provided  in  clause  (1)  of 
subdivision  (a)  of  section  205,  and  the  portion 
of  the  war-profits  and  excess-profits  tax  com- 
puted for  the  entire  period  under  clause  (2) 
of  subdivision  (a)  of  section  335  shall  be 
credited  against  the  net  income  computed  for 
the  entire  period  as  provided  in  clause  (2)  of 
subdivision  (a)  of  section  205. 


(2)  In  the  case  of  a  corporation  which  makes  re- 
turn for  a  fiscal  year  beginning  in  1921,  and 
ending  in  1922,  in  computing  the  income  tax  as 
provided  in  subdivision  (b)  of  section  205,  the 
war-profits  and  excess-profits  tax  computed 
under  subdivision  (b)  of  section  335  shall  be 
credited  against  the  net  income  computed  for 
the  entire  period  as  provided  in  clause  (1)  of 
subdivision  (b)  of  section  205. 

CREDIT,    AGAINST   TAX    COMPUTED    ON    RETURN     OF    TAX 
PAID  ON  INCOME  INCLUDED  IN  THE  RETURN. 
Section  222:  Individuals— The  tax  computed  under  part  two 

of  the  Income  Tax  Law,  shall  be  credited  with : 
178  (a)  (1)  In  the  case  of  a  citizen  of  the  United  States: 
the  amount  of  any  income,  war-profits  tax,  and 
excess  profits  tax  paid  during  the  taxable  year 
to  any  foreign  country  or  to  any  possession  of 
the  United  States. 

(2)  In  the  case  of  a  resident  of  the  United  States: 

(a)  The  amount  of  any  such  tax  paid  during 
the  taxable  year  to  any  possession  of  the 
United  States. 

(b)  The  amount  of  any  such  taxes  paid  dur- 
ing the  taxable  year  to  any  foreign  coun- 


179 


Income  Tax 


69 


180 


181 


try,  if  the  foreign  country  of  which  such 
resident  alien  is  a  citizen  or  subject,  in 
imposing  such  taxes,  allows  a  similar 
credit  to  citizens  of  the  United  States  re- 
siding in  such  country. 

(3)  In  the  case  of  any  such  individual  in  the  fore- 
going classes  who  is  a  member  of  a  partnership 
or  the  beneficiary  of  an  estate  or  trust,  his  pro- 
portionate share  of  such  taxes  of  the  partnership 
or  the  estate  or  trust,  paid  during  the  taxable 
year  to  a  foreign  country  or  to  any  possession 
of  the  United  States,  as  the  case  may  be. 

(4)  The  above  credits  shall  not  be  allowed  in  the 
case  of  a  citizen  entitled  to  the  benefits  of  section 
262;  and  in  no  other  case  shall  the  amount  of 
credit  taken  under  this  subdivision  exceed  the 
same  proportion  of  the  tax,  against  which  such 
credit  is  taken,  which  the  taxpayer's  net  income 
(computed  without  deduction  for  any  income, 
war-profits,  and  excess  profits  taxes  imposed  by 
any  foreign  country  or  possession  of  the  United 
States)  from  sources  without  the  United  States 
bears  to  his  entire  net  income  (computed  without 
such  deduction)  for  the  same  taxable  year. 

Example : 


French  Tax 

United  States  Tax 

French  net  income  without 
deduction  for  French  tax. 

United  States  taxable  in- 
come without  deduc- 
tion for  French  tax 


United  States 
Net  Income 


$20,000 


Net  Income 
in  France 


$10,000 
$1,250 

$10,000 
$30,000  =  H 


Total 
Net  Income 


$30,000 


$3,890 


United  States  tax  $3,890X  i^=credit,  $1,296.67       . 

t^redit  cannot  exceed  amount  of  foreign  tax |i  250 

Balance  of  tax  to  be  paid  on  return |2  640 


70 


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Income  Tax 


71 


182  (5)  Tax  collected  at  the  source  on  income  included 

in  the  return  of  income. 

183  (b)  If  accrued  taxes  when  paid  differ  from  the  amounts 

claimed  as  credits  by  the  taxpayer,  or  if  any  tax  paid 
is  refunded  in  whole  or  in  part,  the  taxpayer  shall 
notify  the  Commissioner,  who  shall  redetermine  the 
amount  of  the  tax  due  under  Part  II  of  this  title  for 
the  year  or  years  affected,  and  the  amount  of  tax  due 
upon  such  redetermination,  if  any,  shall  be  paid  by 
the  taxpayer  upon  notice  and  demand  by  the  collector, 
or  the  amount  of  tax  overpaid,  if  any,  shall  be  credited 
or  refunded  to  the  taxpayer  in  accordance  with  the 
provisions  of  section  252.  In  the  case  of  such  a  tax 
accrued  but  not  paid,  the  Commissioner  as  a  con- 
dition precedent  to  the  allowance  of  this  credit  may 
require  the  taxpayer  to  give  a  bond  with  sureties 
satisfactory  to  and  to  be  approved  by  the  Commis- 
sioner in  such  penal  sum  as  the  Commissioner  may 
require,  conditioned  for  the  payment  by  the  taxpayer 
of  any  amount  of  tax  found  due  upon  any  such  re- 
determination; and  the  bond  herein  prescribed  shall 
contain  such  further  conditions  as  the  Commissioner 
may   require. 

184  (c)   These  credits  shall  be  allowed  only  if  the  taxpayer 

furnishes  evidence  satisfactory  to  the  Commissioner 
showing  the  amount  of  income  derived  from  sources 
without  the  United  States,  and  all  other  information 
necessary  for  the  verification  and  computation  of 
such  credits. 

185  (d)   If  the  taxpayer  makes  a  return  for  a  fiscal  year  be- 

ginning in  1920  and  ending  in  1921,  the  credit  for 
the  entire  fiscal  year,  shall,  notwithstanding  any 
provision  of  this  Act,  be  determined  under  the  pro- 
visions of  this  section ;  and  the  Commissioner  is 
authorized  to  disallow,  in  whole  or  in  part,  any  such 
credit  which  he  finds  has  already  been  taken  by  the 
taxpayer. 

CORPORATIONS— CREDIT  FOR  TAX  PAID 
Section  238: 

186  (a)  In  the  case  of  a  domestic  corporation,  the  total  tax 

imposed  by  the  Revenue  Act  of  1921,  shall  be  credited 


with  the  amount  of  any  income,  war-profits  and  ex- 
cess profits  tax,  paid  during  the  same  taxable  year, 
to  any  foreign  country,  or  to  any  possession  of  the 
United  States:  Provided,  that  the  amount  of  credit 
shall  in  no  case  exceed  that  proportion  of  the  United 
States  tax,  which  the  taxpayer's  foreign  net  income 
computed  without  deduction  for  foreign  tax,  bears 
to  its  entire  net  income  computed  without  deduction 
for  foreign  tax,  for  the  same  taxable  year. 
In  the  case  of  domestic  insurance  companies  subject 
to  the  tax  imposed  by  section  243  (income  tax  only) 
or  section  246  (income  and  excess  profits  tax  for  1921 
and  income  tax  only  thereafter),  the  term  "net  in- 
come" as  used  in  these  paragraphs  means  the  net 
income  as  defined  in  sections  245  and  246  respectively. 

187  (b)  If  accrued  taxes  when  paid  differ  from  the  amounts 

claimed  as  credits  by  the  corporation,  or  if  any  tax 
paid  is  refunded  in  whole  or  in  part,  the  corporation 
shall  at  once  notify  the  Conamissioner  who  shall  re- 
determine the  amount  of  the  income,  war-profits  and 
excess-profits  taxes  for  the  year  or  years  affected,  and 
the  amount  of  taxes  due  upon  such  redetermination, 
if  any,  shall  be  paid  by  the  corporation  upon  notice 
and  demand  by  the  collector,  or  the  amount  of  taxes 
overpaid,  if  any,  shall  be  credited  or  refunded  to  the 
corporation  in  accordance  with  the  provisions  of  sec- 
tion 252.  In  the  case  of  such  a  tax  accrued  but  not 
paid,  the  Commissioner  as  a  condition  precedent  to 
the  allowance  of  this  credit  may  require  the  corpora- 
tion to  give  a  bond  with  sureties  satisfactory  to  and 
to  be  approved  by  him  in  such  penal  sum  as  he  may 
require,  conditioned  for  the  payment  by  the  taxpayer 
of  any  amount  of  taxes  found  due  upon  any  such 
redetermination ;  and  the  bond  herein  prescribed  shall 
contain  such  further  conditions  as  the  Conunissioner 
may  require. 

188  (c)  These  credits  shall  be  allowed  only  if  the  taxpayer 

furnishes  evidence  satisfactory  to  the  Commissioner 
showing  the  amount  of  income  derived  from  sources 
without  the  United  States,  and  all  other  information 


72 


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Income  Tax 


78 


necessary  for  the  verification  and  computation  of 
such  credits. 

189  (d)   If  a  domestic  corporation  makes  a  return  for  a  fiscal 

year  beginning  in  1920  and  ending  in  1921,  the  credit 
for  the  entire  fiscal  year  shall,  notwithstanding  any 
provision  of  this  Act,  be  determined  under  the  pro- 
visions of  this  section;  and  the  Commissioner  is 
authorized  to  disallow,  in  whole  or  in  part,  any  such 
credit  w^hich  he  finds  has  already  been  taken  by  the 
taxpayer. 

190  (e)  For  the  purposes  of  this  section  a  domestic  corpora- 

tion which  owns  a  majority  of  the  voting  stock  of  a 
foreign  corporation  from  which  it  receives  dividends 
(not  deductible  under  section  234),   in  any  taxable 
year  shall  be  deemed  to  have  paid  the  same  propor- 
tion of  any  income,  war-profits  or  excess-profits  taxes 
paid   by   such    foreign    corporation    to    any    foreign 
country  or  to  any  possession  of  the  United  States, 
upon  or  with  respect  to  the  accumulated  profits  of 
such  foreign  corporation  from  which  such  dividend 
was  paid,  which  the  amount  of  such  dividends  bears 
to   the   amount   of   such   accumulated    profits:    Pro- 
vided, That  the  credit  allowed  to  any  domestic  cor- 
poration under  this  subdivision  shall  in  no  case  ex- 
ceed the  same  proportion  of  the  taxes  against  which 
it  is  credited,  which  the  amount  of  such  dividends 
bears  to  the  amount  of  the  entire  net  income  of  the 
domestic   corporation    in    which   such   dividends   are 
included.    The  term  "accumulated  profits"  when  used 
in  this  subdivision  in  reference  to  a  foreign  corpora- 
tion, means  the  amount  of  its  gains,  profits,  or  in- 
come in  excess  of  the  income,  war-profits  and  excess 
profits  taxes  imposed  upon  or  with  respect  to  such 
profits  or  income;  and  the  Commissioner  with  the 
approval  of  the  Secretary  shall  have  full  r)Ower  to 
determine  from  the  accumulated  profits  of  what  year 
or  years  such  dividends  were  paid,  treating  dividends 
paid  in  the  first  sixty  days  of  any  year  aa  having  been 
paid  from  the  accumulated  profits  of  the  preceding 
year  or  years  (unless  to  his  satisfaction  shown  other- 
wise)   and  in  other  respects  treating  dividends  as 


having  been  paid  from  the  most  recently  accumulated 
gains,  profits  or  earnings.  In  the  case  of  a  foreign 
corporation,  the  income,  war-profits  and  excess- 
profits  taxes  of  which  are  determined  on  the  basis  of 
an  accounting  period  of  less  than  one  year,  the  word 
"year"  as  used  in  this  subdivision  shall  be  construed 
to  mean  such  accounting  period. 

Example : 

191  Take  a  United  States  corporation  with  a  capital  of 
$500,000  and  a  net  income  of  $100,000,  including  a  Canadian 
dividend;  total  tax  $40,420.  The  United  States  corporation 
owns  the  entire  capital  stock  of  the  Canadian  corporation, 
which  has  an  outstanding  capital  stock  of 

$100,000  and  a  net  income  of $20,000.00 

Canadian  Income  Tax  @  10% 2,000.00 

Balance  of  accumulated  profits  subject 

to    dividend 18,000.00 

10%    dividend    paid    to    United    States 

corporation   10,000.00 

Ratio  of  dividend  to  accumulated  profits 
from  which  dividend  paid   =   5/9, 
the    proportion    of    Canadian    tax 
which    may    be    deducted    by    the 
United  States  corporation: 
Canadian    tax    paid,    $2,000  X  5/9  =     $1,111.11 
Provided,  that  the  credit  for  foreign  tax  allowed  to  the 
United  States  corporation  shall  in  no  case  exceed  the  propor- 
tion of   the  United  States  tax  which  the  amount  of   such 
dividend  bears  to  the  amount  of  the  United  States  net  income 
in  which  such  dividend  was  included. 

United    States    net    income    in    which 

Canadian  dividend  included $100,000.00 

Amount  of  Canadian  dividend 10,000.00 

Ratio  of  Canadian  dividend  to  United 

States  net  income   =    1/10: 
United  States  tax  $40,420  X  1/10  = 
Maximum    allowance    unless    Ca- 
nadian ratio  produces  less $4,042.00 

In  this  case  Canadian  ratio  being  "less"  will  be  used. 

192  Foreign  corporations  take  credit  for  tax  collected  at  the 
source  on  income  included  in  a  return  of  income. 


',    u 


_.J 


74 


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Income  Tax 


75 


193  (f)  For  the  purposes  of  this  section  a  corporation  en- 

titled to  the  benefits  of  section  262  shall  be  treated 
as  a  forei^  corporation. 

PAYMENT,  OR  COLLECTION,  OF  TAX  AT  THE  SOURCE 
Who  Are  Subject:    Sections  221  and  237  of  the  law— 

194  This  provision  of  law  applies  to  nonresident  alien  in- 
dividuals; partnerships  composed  in  whole  or  in  part  of  non- 
resident alien  individuals;  domestic  partnerships  which  own 
tax-free  covenant  bonds ;  foreign  corporations  not  engaged  in 
t^de  or  business  within  the  United  States  and  having  no 
office  or  place  of  business  therein. 

Applies  to  What: 

195  Interest  (not  including  interest  on  deposits  with  per- 
sons carrying  on  a  banking  business,  paid  to  persons  not 
engaged  m  business  in  the  United  States  and  not  having  an 
office  or  place  of  business  therein). 

Rents 

Salaries 

Wages 

Premiums 

Annuities 

Compensations 

Remunerations 

Emoluments,  or 

Other  fixed  or  determinable  annual  or  periodical  gains 
profits,  and  income. 
But  only  for  the  normal  tax  to  individuals  and  the  income  tax 
to  foreign  corporations. 

AMOUNT  OR  RATE   TO   BE   PAID   BY  COLLECTION  AT   THE 

SOURCE  OF  THE  INCOME.  """^"'''^   ^^    ™^ 

196  On  all  of  the  above,  with  the  exception  of  interest  on 
tax-free  covenant  bonds,  the  rate  to  be  collected  from  pav- 
ments  to  nonresident  alien  individuals  and  partnerships  is 
8%;  from  payments  to  foreign  corporations  subject  to  this 
method  of  collection,  the  rate  for  income  tax  for  1921  is  lO'?^ 
and  for  subsequent  years,  121/2%,  of  the  payments  made. 

TAX  COVENANT  INTEREST. 

197  Where  bonds,  mortgages,  deeds  of  trust,  or  other  sim- 
ilar obligations  of  corporations  containing  a  contract  or 
provision  by  which  obligor  agrees  to  pay  any  portion  of  the 


tax  imposed  by  the  Income  Tax  Law  upon  the  obligee,  or 
to  reimburse  the  obligee  for  any  portion  of  the  tax,  to  pay 
the  interest  without  deduction  for  any  tax  which  the  obligor 
may  be  required  or  permitted  to  pay  thereon,  or  to  retain 
therefrom  under  any  law  of  the  United  States — such  corpo- 
rate obligation  is  said  to  contain  a  tax-free  covenant.     In 
such  cases  the  obligor  is  required  to  deduct  and  withhold 
from  the  interest  paid  on  such  obligations,  a  tax  equal  to 
2%  of  the  interest  paid,  whether  such  interest  is  payable 
annually  or  at  shorter  or  longer  periods  and  whether  payable 
to  a  nonresident  alien  individual  or  to  an  individual  citizen 
or  resident  of  the  United  States  or  to  a  partnership,  or  to 
a  foreign  corporation  not  engaged  in  trade  or  business  with- 
in the  United  States  and  not  having  an  office  or  place  of 
business  therein.     Citizens  and  resident  aliens  may  receive 
tax  covenant  interest  free  from  all  collection  at  the  source 
(they  assuming  all  tax  liability  themselves)   by  filing  with 
the  withholding  agent,  either  at  the  time  of  collection  of  the 
interest  or  not  later  than  February  1  of  the  year  in  which 
the  return  of  income  for  the  preceding  calendar  year  is  to 
be  made,  a  notice  in  writing  claiming  the  benefit  of  the 
personal  exemptions  provided  by  section  216  of  the   law. 
Nonresident  alien  individuals  may  likewise  receive  such  in- 
terest free  from  collection  at  the  source  (they  assuming  all 
tax  liability)  by  furnishing  information  and  filing  the  same 
with  the  withholding  agent  in  manner  and  form  to  be  pre- 
scribed by  the  Commissioner  of  Internal  Revenue. 

LIMIT  OF  AMOUNT  OF  TAX  FREE  COVENANT  INTEREST 
WHICH  MAY  BE  COLLECTED  FREE  FROM  COLLECTION  AT 
THE  SOURCE. 

198  The  total  of  personal  exemptions  to  which  the  taxpayer 
may  be  entitled,  is  the  limit  of  claims  for  exemption  from 
collection  of  2%  normal  tax  at  the  source  on  tax  covenant 
interest. 

Single  individuals  (citizens  or  resident  aliens),  and  non- 
resident aliens,  have  a  personal  exemption  of  $1,000  each. 
Heads  of  families  or  married  persons  living  together  and 
having  taxable  net  income  not  in  excess  of  $5,000  have  a  personal 
exemption  of  $2,500  per  head  of  family  or  married  couple 
living  together,  or  $2,000  if  the  taxable  net  income  exceeds 
$5,000.  (See  1fl57,  exemption  in  computing  tax.) 
Citizen  or  resident  alien  taxpayers    (whether   single  or 


.IlKi 


immnMmwRMmMMii^^ 


76 


Income  Tax 


Income  Tax 


77 


married  or  heads  of  families)  who  are  the  chief  support 
of  dependents  under  eighteen  years  of  age  or  of  persons 
over  eighteen  years  of  age  if  such  persons  are  incapable  of 
self  support  because  of  physical  or  mental  disability,  have 
an  exemption  of  $400  for  each  such  dependent. 

Nonresident   alien   taxpayers   do   not  have   an   exemption 
for  dependents. 

199  The  foregoing  exemptions  are  personal  to  the  taxpayer 
and  when  the  amount  thereof  is  equaled  by  tax  covenant 
interest  received  free  from  collection  at  the  source,  any  fur- 
ther receipt  of  such  interest  is  subject  to  collection  at  the 
source. 

HOW  EXEMPTION  IS  CLAIMED. 

200  In  the  case  of  citizens  and  resident  aliens,  the  owner- 
ship certificates,  provided  to  be  used  in  connection  with  the 
collection  of  interest,  serve  the  purpose  of  claim.  Owner- 
ship certificate,  form  1001,  is  printed  in  black  ink  on  yellow 
paper.  The  use  of  this  form  by  a  citizen  or  resident  alien 
is  notice  to  the  withholding  agent  (the  person  or  corporation 
paying  the  interest),  that  the  taxpayer  elects  to  claim  the 
benefit  of  exemption  from  withholding.  Nonresident  alien 
individuals,  foreign  partnerships  and  corporations  not  en- 
gaged m  trade  or  business  within  the  United  States  and  not 
having  an  office  or  place  of  business  therein  are  required 
to  use  form  1000.  They  may  claim  exemption  from  collec- 
tion of  tax  at  the  source  by  filing  with  the  withholding  agent 
on  or  before  February  1,  next  succeeding  the  year  for  which 
returns  of  income  are  required  to  be  made,  a  claim  on  form 

lUUliJ. 

ADVANTAGE  OF  COLLECTION  AT  THE  SOURCE  TO  THE  TAX 
PAYER  AND  HOW  EFFECTED.  ^  ixir.  iaa- 

201  Where  corporations  have  issued  obligations  containing 
a  tax  covenant  and  there  is  no  claim  of  exemption  from  col- 
lection  of  tax  at  the  source,  the  debtor  corporation  (obligor 
m  the  bonds,  etc.)  restores  the  amount  deducted  and  with- 
held and  therefore  pays  interest  in  full.  This  tax  collected 
by  the  withholding  agent  is  turned  over  to  the  Government 
and  IS  placed  to  the  credit  of  the  taxpayer.  This  tax  col- 
lected  at  the  source  is  not  required  to  be  included  in  his 
return  of  income.  Only  the  contract  interest  paid  is  included 
m  the  return  of  income.    Against  the  tax  computed  on  the 


return  of  income,  the  taxpayer  takes  a  credit  for  the  amount 
of  tax  collected,  at  the  source  of  the  income,  by  the  with- 
holding agent. 

Illustration: 

$1,000,  5%  tax  covenant  bond — Interest  $50;  tax  @  4%  = 
Deducted  and  withheld  at  source 1  $2.00 

Remainder   $49 

Collection   restored    i 

Tax 

Received  by  bond  owner $50  =  $2.00 

Credit  for  collection  at  source I.OO 

Amount  of  tax  paid  by  taxpayer $1.00 

METHOD    OF   SECURING   ADVANTAGE   OF    COLLECTION   OF 

202  Citizens  and  resident  aliens  have  an  election  as  to 
whether  they  will  use  ownership  certificates  form  1001  (yel- 
low), or  form  1000  (white);  non-resident  aliens  must  use 
form  1000,  but  may  submit  in  connection  with  form  1000, 
claim  for  personal  exemption  on  form  lOOlB.  The  use  of 
form  1000  is  notice  to  the  withholding  agent  that  the  tax- 
payer elects  not  to  claim  exemption  from  withholding.  The 
law  then  casts  on  the  withholding  agent  the  duty  of  making 
collection  of  tax  from  payments  he  makes  in  connection  with 
which  the  form  1000  is  used.  Foreign  corporations  subject 
to  collection  of  tax  at  the  source  must  also  use  certificate 
form  1000. 

203  The  foregoing  is  in  accordance  with  regulations  here- 
tofore existing.  The  Act  of  1921  as  to  withholding  is  sub- 
stantially the  same  as  the  Act  of  1918  under  which  previous 
regulations  were  promulgated. 

204  Income  upon  which  any  tax  is  required  to  be  withheld 
at  the  source  under  this  section  shall  be  included  in  the 
return  of  the  recipient  of  such  income,  but  any  tax  so  with- 
held shall  be  credited  against  the  amount  of  income  tax  as 
computed  in  such  return. 

205  If  any  tax  required  under  this  section  to  be  deducted 
and  withheld  is  paid  by  the  recipient  of  the  income  it  shall 
not  be  re-collected  from  the  withholding  agent;  nor  in  cases 


78 


Income  Tax 


in  which  the  tax  is  so  paid  shall  any  penalty  be  imposed 
upon  or  collected  from  the  recipient  of  the  income  or  the 
withholding  agent  for  failure  to  return  or  pay  the  same, 
unless  such  failure  was  fraudulent  and  for  the  purpose  of 
evading  pa5mient. 

OWNERSHIP    CERTIFICATES    REQUIRED     IN     CONNECTION 
WITH  COLLECTION  OF  INCOME. 

206  There  are  three  general  classes  of  ownership  certifi- 
cates required  in  connection  with  collection  of  interest  from 
obligations  of  domestic  corporations: 

207  (a)  Form  1000  (white)  to  be  used  by  citizens  and  resi- 

dent aliens  and  partnerships  with  coupons  from 
tax  covenant  bonds,  and  by  nonresident  alien  in- 
dividuals and  partnerships  and  foreign  corpora- 
tions not  engaged  in  trade  or  business  within  the 
United  States  and  not  having  an  office  or  place 
of  business  therein,  with  coupons  from  all  domestic 
corporation  bonds.  The  certificate  is  so  construct- 
ed as  to  provide  for  entry  thereon  by  these  several 
classes  of  taxpayers  of  the  classes  of  income  to 
which  the  certificate  relates. 

208  (b)     Form   1001    (yellow)    to  be   used   by   citizens  and 

resident  aliens  and  domestic  partnerships: 

(1)  For  the  purpose  of  claiming  exemption  from 
collection  at  the  source  of  2%  normal  tax  on 
tax  covenant  bonds. 

(2)  With  coupons  from  bonds  not  having  a  tax 
covenant.  And  by  domestic  corporations, 
with  coupons  from  all  bonds,  whether  or  not 
they  contain  a  tax  covenant.  Domestic  cor- 
porations are  not  subject  to  collection  of 
tax  at  the  source  and  for  this  reason  are 
required  to  use  form  1001. 

209  (c)     Form  lOOlA  (green)  to  be  used  in  connection  with 

collection  of  interest  on  foreign  items.  This  means 
foreign  payments  of  interest  or  dividends  by  means 
of  coupons,  checks,  or  bills  of  exchange. 


Income  Tax 


79 


EXCESS-PROFITS  AND  WAR-PROFITS  TAX. 

210  The  excess-profits  tax  is  imposed  for  1921  on  net  tax- 
able income  of  corporations,  upon  an  amount  thereof  in 
excess  of  the  excess-profits  tax  credit. 

211  The  excess  profits  tax  credit  is  S%  of  the  invested 
capital  plus  a  specific  exemption  of  $3,000.  If  the  entire 
credit  is  not  used  in  the  first  bracket  of  the  tax,  the  re- 
mainder is  carried  to  the  second  bracket  of  the  tax. 

212  The  net  income  for  excess-profits  tax,  is  the  net  tax- 
able income  as  computed  on  a  return  of  income. 

213  The  amount  of  the  tax  thus  computed  is  the  excess- 
profits  tax  to  be  paid  and  also  to  be  used  as  a  credit  for 
income  tax,  unless  the  excess-profits  tax  computed  under 
section  302  of  the  Act  is  less  than  the  tax  computed  as  above. 
The  tax  under  section  302  is: 

20%  of  amount  of  net  income  in  excess  of  $3,000  and  not 
exceeding  $20,000. 

Plus  40%  of  the  amount  of  net  income  in  excess  of 
$20,000. 

214  Corporations  exempt  from  income  tax  and  corporations 
having  a  net  income  of  less  than  $3,000  for  the  taxable  year, 
are  exempt  from  excess-profits  tax. 

215  The  excess-profits  tax  provisions  of  the  Revenue  Act 
of  1918  with  the  elimination  only  of  obsolete  provisions  of 
that  Act,  are  carried  forward  into  the  Revenue  Act  of  1921 
and  the  regulations  for  computation  of  the  tax  under  the 
former  Act  will  apply  for  the  computation  of  the  tax  under 
the  Act  of  1921. 

216  The  excess-profits  tax  provisions  of  the  Revenue  Act 
of  1921  are  to  become  obsolete  as  of  January  1,  1922. 

217  The  excess-profits  tax  is  computed  on  the  net  income 
as  disclosed  by  income  tax  return,  whether  such  income  and 
return  be  for  the  full  twelve  months  or  for  a  year's  period. 
The  capital  used  for  the  purpose  of  this  computation  is  the 
average  invested  capital  for  the  twelve  months  of  the  tax- 
able year,  but  in  case  the  taxable  period  is  less  than  twelve 
months,  then  the  invested  capital  for  the  lesser  period  is  the 
same  fraction  of  the  average  invested  capital  for  the  year 
that  the  period  covered  is  of  twelve  months,  and  in  such  case 
also  the  $3,000  specific  exemption  shall  be  reduced  to  an 


A 


80 


Income  Tax 


|j 


amount  which  is  the  same  proportion  of  $3,000  as  the  number 
of  months  in  the  period  covered  is  of  twelve  months. 

218    Because  of  the  provisions  in  the  Excess-Profits  Tax  Law 

for  averaging  of  capital  and  specific  credit,  and  also  because 
the  corporation  income  tax  is  at  a  flat  rate  of  10%  for  the 
year  1921,  the  new  provision  in  section  226  (c)  for  computa- 
tion of  income  tax  for  a  period  less  than  twelve  months  does 
not  have  the  drastic  effect  that  it  does  where  individual  tax 
is  to  be  computed.     (1fl42.)     Example: 

Taxable  period  of  three  months;  invested  capital,  $50,000. 
Net  income,  $20,000. 

Invested  capital  for  computation  of  tax  is  same  proportion  of 
actual  invested  capital  that  period  covered  is  of  12  months  =  }^     $12 ,  500 


Credit  @  8%  of  average  capital. . . 
Same  proportion  of  $3,000  as  of  acti 

$1,000 

lal  canital  = 

760 

Excess-profits  tax  credit 

$1,750 

Tnoome 

Crodit 
$1,750 

Balance 

l^ate 

Tax 

20%  of  Capital « 

Balance 

.V  2,500 
17,500 

$750 
17,500 

20% 

40% 

$150 
7,000 

Net  Income 

$20,000 

$1,750 

$18,250 

$7,150 

Sec.  302  ajiplies: 

Net  Income.  .$20,000  -$3,000  =  $17,0(K)  (&,  20%  =  $3,400        $3,400.00 

+  Specific  Credit 2 ,  000 

Less  Credit .  .  $5 ,  400     Credit  for  Income  Tax .  =     $5 ,  400 

Subject  to  In- 
come Tax. .  .$14,600  X  12  mos.  =  $58,400 4-  3  mos.  = 

$19,406.67  @  10%  =  $1,946.67 
Ji  for  Income  Tax =     $486. 67 

Total  Tax =$3,886.67 

Income  Tax  without  averaging  would  be , . . .  $1 ,  4<50 

and  Total  Tax  would  be 4,8(M) 

219  The  rules  for  computation  of  invested  capital  and  com- 
putation of  excess-profits  tax  not  being  changed,  but  in  all 
respects  remaining  as  under  the  Revenue  Act  of  1918,  are  not 
reproduced  here. 


Income  Tax 


81 


PAYMENT  OF  THE  TAX. 

220  The  tax  upon  income,  whether  income  tax  only  or  in- 
come and  excess-profits  tax,  being  determined,  is  to  be  paid. 
The  tax  may  be  paid  in  its  entirety  at  the  time  of  filing  the 
return  of  income,  or  it  may  be  paid,  ^  at  the  time  of  filing 
the  return  of  income  (not  later  than  March  15th)  and  the 
other  three  installments  of  %  each  on  June  15th,  September 
15th  and  December  15th  next  following.  Where  the  return 
is  made  on  the  basis  of  a  fiscal  year,  the  first  installment 
is  to  be  paid  at  the  time  of  filing  the  return ;  the  remaining 
installments  of  ^  of  the  tax  each,  are  to  be  paid  on  or  before 
the  15th  day  of  the  third,  sixth  and  ninth  months  after  the 
return  is  due. 

221  The  tax  is  to  be  paid  with  cash,  money  order  or  check 
(certified  or  uncertified)  or  with  notes  or  certificates  of 
indebtedness  of  the  Treasury  of  the  United  States.  Such 
notes  and  certificates  are  receivable  in  payment  of  tax,  by 
the  Collector  of  Internal  Revenue  at  par  with  adjustment  for 
accrued  interest  to  the  time  of  payment  of  tax. 

222  The  foregoing  are  general  rules.  Modifications  of  the 
general  rules  and  prescription  for  penalties  and  interest  are 
to  be  found  in  sections  250,  253,  1302  and  1311  of  the  Revenue 
Act  of  1921. 

RECEIPTS  FOR  TAX  PAID. 

223  Collectors  of  Internal  Revenue  are  required  to  give 
receipts  for  tax  paid,  when  such  receipts  are  requested.  The 
receipt  is  to  be  written  or  printed  and  shall  state  the  amount 
paid  and  the  particular  account  for  which  such  payment  is 
made. 

REFUNDS. 

224  Section  252.  Where  it  appears  upon  an  examination  of 
any  return  that  an  amount  of  tax  has  been  paid  in  excess 
of  that  properly  due,  the  excess  may  be  credited  against  any 
further  tax  then  due,  or  shall  be  refunded  to  the  taxpayer. 
Refunds  are  made  upon  claim  therefor.  Refund  claims  must 
be  made  within  five  years  from  the  date  the  return  (on  which 
the  overpayment  was  made)  was  due.  Sections  1315,  1316, 
1317  and  1324  provide  further  details  as  to  refunds. 


m 


I 


82 


Income  Tax 


Income  Tax 


83 


I 


INTEREST  ON  REFUNDS. 

225  Section  1324  provides  for  the  payment  of  interest  on 
overpayments  of  tax  allowed  on  refund  at  the  rate  of  1% 
per  month  from  different  dates,  according  to  the  facts 
specified  in  the  section. 

LIMITATION   OF   EXAMINATIONS   AND   FINAL  DETERMINA- 
TION  AND  ASSESSMENT  OF  TAX 

226  Sections  1308,  1309,  1312  and  1313  provide  for  a  final 
determination  of  tax  liability,  and  when  complied  with,  a  case 
IS  not  to  be  reopened. 

LIMITATION  UPON  SUITS  AND  PROSECUTIONS. 

227  Sections  1318  to  1325  inclusive  specify  the  details  of 
such  limitations. 

LIMITATION  OF  LIBERTY  BOND  EXEMPTIONS. 

Liberty  Bond  Exemptions  Under  Revenue  Act  of  1921 

228  Beginning  January  1,  1921,  and  continuing  for  two 
years  from  July  2,  1921,  the  interest  on  an  aggregate  average 
principal,  annually,  not  exceeding  $130,000,  made  up  of  any 
4%  or  414%,  or  combination  thereof,  of  Liberty  Bonds  not 
including  First  Liberty,  Second  Converted  4y^%  Bond's,  is 
exempt  from  all  normal  and  surtax  to  individuals,  and  in- 
come and  excess  profits  tax  to  corporations. 

229  Beginning  January  1,  1921,  and  continuing  for  two 
years  from  and  after  July  2,  1921,  the  interest  on  an  aggre- 
gate average  principal,  annually,  not  exceeding  $30,000  of 
First  Liberty  Second  Converted  4iA%  Bonds,  is  exempt  from 
all  normal  and  surtax  to  individuals  and  income  and  excess 
profits  tax  to  corporations. 

230  These  maximum  exemptions  are  the  same  as  would 
have  been  possible  under  Liberty  Bond  Acts,  prior  to  the 
Revenue  Act  of  1921,  provided  all  conditions  of  collateral 
exemption  should  be  in  force  in  a  particular  case.  The  effect 
of  the  Revenue  Act  of  1921  is  to  eliminate  all  requirements 
in  connection  with  collateral  exemptions  and  to  provide  out- 
right a  total  amount  of  possible  exemption  of  Liberty  Bond 
interest  for  two  years  after  July  2,  1921  (or  until  July  2, 
1923)  of  interest  on  an  aggregate  average  principal  of 
$160,000. 


231  For  1921  this  applies  both  to  individuals  and  corpora- 
tions. After  1921  all  Liberty  Bond  interest  will  be  exempt 
to  corporations,  because  the  only  corporation  tax  which  would 
apply  to  any  corporate  income  from  Liberty  Bonds,  is  the 
excess-profits  tax,  and  such  tax  is  not  levied  by  the  Act  of 
1921  after  December  31,  1921. 

232  After  July  2,  1923,  and  until  July  2,  1926,  the  Revenue 
Act  of  1921  provides  an  exemption  of  Liberty  Bond  interest 
on  an  aggregate  average  principal  of  such  bonds  not  exceed- 
ing annually  $55,000  to  individuals,  partnerships  and  estates 
or  trusts,  such  principal  to  be  made  up  of  4%,  4l^%  or  any 
combination  thereof  of  such  bonds.  This  may  include  First 
Liberty,  Second  Converted  4^/4%  Bonds. 

233  After  July  2,  1926,  the  total  exemption  is  $5,000,  made 
up  of  any  4%  or  41/4%  Liberty  Bonds  or  combination  thereof. 


f- 


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Income  Tax 


CONSOLIDATED  RETURNS  OF  INCOME  FOR  1917. 

234  Section  1331  is  declaratory  of  the  provisions  of  the 
Revenue  Act  of  1917  with  respect  to  consolidated  returns  of 
income  under  that  Act  by  affiliated  corporations. 

ALTERNATIVE  TAX  ON  PERSONAL  SERVICE  CORPORATION. 

235  Section  1382  provides  that  in  the  event  the  provision 
for  taxation  of  income  of  personal  service  corporations  under 
the  Revenue  Act  of  1918  or  Revenue  Act  of  1921  shall  be  by 
final  adjudication  declared  invalid,  such  income  shall  be 
taxed  as  the  income  of  ordinary  corporations  and  provides 
the  details  of  accounting  for  such  tax. 

PORTO  RICO  AND  PHILIPPINE  ISLANDS 

236  Section  261  provides  that  the  taxation  of  income  in 
these  Possessions  of  the  United  States  is  not  affected  by  the 
Revenue  Act  of  1921,  but  is  in  all  respects  to  be  levied,  as- 
sessed and  collected  and  paid  in  those  Islands  at  the  pleasure 
of  their  respective  legislatures. 

CITIZENS  OF  A  POSSESSION  OF  THE  UNITED  STATES 

237  Section  260  defines  who  are,  and  their  status  with  re- 
spect to  taxation  of  income  from  sources  within  the  United 
States. 

INCOME   FROM   SOURCES   WITHIN   A   POSSESSION    OF   THE 
UNITED  STATES. 

238  Section  262  defines  what  is  such  income  and  its  status 
with  respect  to  United  States  taxation. 

CHILD  LABOR  AND  INCOME  TAX. 

239  Sections  1200  to  1207  provide  for  the  levy,  assessment 
and  collection  in  addition  to  all  other  taxes,  of  an  excise 
tax  of  10%  of  the  total  net  income  from  a  business  employ- 
ing such  labor  and  the  detail  of  such  levy,  assessment  and 
collection,  together  with  penalty  for  violation  of  the  Act. 

240  Similar  Acts  have  twice  been  declared  unconstitutional 
by  a  United  States  District  Court  and  once  by  a  Supreme 
Court  of  the  United  States.  Resort  is  had  to  calling  the  tax 
an  excise  tax.  It  would  appear  to  be  essentially  an  income 
tax. 


Tables  and  Charts 


87 


TABLE  I 

Comparison  of  tax  on  individual  income  (married  persons  living 
together)  at  the  lowest  rates  under  the  Act  of  1918  with  tax  on  the 
same  amounts  for  1921  and  thereafter  under  the  Act  of  1921. 

The  following  table,  which  is  for  a  married  man  or  woman  claiming  personal  exemption  but  not 
exemption  for  tlependenfg,  shows  the  normal  rates,  surtax,  and  amount  of  tax  on  Incomes  up  to 
?l,Oi3«,000  for  1921   and  1922  under  the  new  law  and  for   1920  under  the  old  law 


♦Net 
Income 


$3,000 
4,000 
5,000 
6,000 
8,000 
10,000 
12,000 
14,000 
16,000 
18,000 
20,000 
22,000 
24,000 
26,000 
28,000 
30,000 
32,000 
34,000 
36,000 
38,000 
40,000 
42,000 
44,000 
46,000 
48,000 
60,000 
62,000 
54,000 
56,000 
58,000 
60,000 
62,000 
64,000 
66,000 
68,000 
70,000 
72,000 
74,000 
76,000 
78,000 
80,000 
82,000 
84,000 
86,000 
88,000 
90,000 
92,000 
94,000 
96 , OUO 
98,000 
100.000 
150,000 
200,000 
300,000 
500.000 
1,000,000 


Per  Cent 

of  Normal 

Tax 


4 
4 
4 
4 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 


Per  Cent 

of  Surtax 

1921 


1 
2 
3 

4 
5 
6 
7 
8 
9 
10 
11 
12 
13 
14 
15 
16 
17 
18 
19 
20 
21 
22 
23 
24 
25 
26 
27 
28 
29 
30 
31 
32 
33 
34 
35 
36 
37 
38 
39 
40 
41 
42 
43 
44 
45 
46 
47 
48 
52 
56 
60 
63 
64 


Pel  Cent 

of  Surtax 

1922  an 

Thereafter 


1 
1 
2 
3 

4 
5 
6 
8 
9 
10 
11 
12 
13 
15 
15 
16 
17 
18 
19 
20 
21 
22 
23 
24 
25 
26 
27 
28 
29 
30 
31 
32 
33 
34 
35 
36 
37 
38 
39 
40 
41 
42 
43 
44 
45 
46 
47 
48 
49 
50 
50 
50 


Per  Cent 

of  Surtax 
Old  Law 


1 

2 
3 
4 
5 
6 
7 
8 
9 
10 
11 
12 
13 
14 
15 
16 
17 
18 
19 
20 
21 
22 
23 
24 
25 
26 
27 
28 
29 
30 
31 
32 
33 
34 
35 
36 
37 
38 
39 
40 
41 
42 
43 
44 
45 
46 
47 
48 
52 
56 
60 
63 
64 


Total 
Tax 
1921 


S20 
60 
100 
170 
370 
590 
830 
1,090 
1,370 
1.670 
1,990 
2,330 
2,690 
3,070 
3,470 
3.890 
4,330 
4,790 
5,270 
5,770 
6,290 
6,830 
7,390 
7,970 
8,670 
9,190 
9.830 
10,490 
11,170 
11,870 
12,590 
13.330 
14,090 
14,870 
15,670 
16,490 
17,330 
18,190 
19,070 
19,970 
20,890 
21,830 
22,790 
23,770 
24.770 
25,790 
26,830 
27.890 
28,1»70 
30,070 
31.190 
61 , 190 
93,190 
161,190 
303,190 
663 , 190 


Total  Tax 
1922  and 
There- 
after 


$20 
60 
100 
160 
340 
520 
720 
940 
1,180 
1,440 
1,720 
2,040 
2,380 
2,740 
3,120 
3.520 
3,940 
4,400 
4.860 
5,340 
5,840 
6,360 
6,900 
7,460 
8,040 
8,640 
9,260 
9,900 
10,660 
11,240 
11,940 
12.060 
13,40tl 
11.160 
14,940 
15,740 
16,660 
17,400 
18,260 
19,140 
20,040 
20.060 
21,900 
22,860 
23,840 
24,840 
25,800 
26.900 
27,960 
29,040 
30,140 
58.140 
86,640 
144, 6 iO 
260,340 
550,640  I 


Total  Tax 
Old  Law 


$40 

80 
120 
170 
870 

590 
830 
1,090 
1,370 
1,670 
1,990 
2,330 
2,690 
3,070 
3,470 
3.890 
4,330 
4,790 
5,270 
5,770 
6,290 
6,830 
7,390 
7,970 
8,570 
9,190 
9,830 
10,490 
11,170 
11.870 
12,590 
13,330 
14,090 
14,870 
15,670 
16,490 
17.330 
18,190 
19,070 
19,970 
20,890 
21,830 
22,790 
23,770 
24,770 
25,790 
26,830 
27,890 
28,970 
30,070 
31,190 
61 , 190 
93,190 
161,190 
303,190 
663,190 


.1 


I 


\*'  t^J^^?^^^^^'^L^^  *."•  P«ts<»al  fflfempiion  of  $2,500  is  allowed  on  Incomes  not  in  excess  ot  $5,000.  and 

$2,000  13  allowed  on  incomes  of  $6,000  or  ot«.  both  under  the  new  law.  Personal  exemption  of  $2  0$0 
18  aUowed  in  computing  the  tax  under  the  old  law.  No  aUo\^ance  is  made  for  credit  fw  dividends' or 
intereet  on  United  States  obUgations,  if  any.  included  in  net  income.  Neither  is  there  any  allowance 
erf  any  exemption  for  dependents.  For  incomes  over  $1,000,000  the  rate  ot  ihe  normal  tax  is  8  per  eeoi. 
the  surtax  for  1821  is  85  per  cent  and  the  surtax  for  1922  and  thereafter  is  50  per  cent.      "  °  '^  "^'" 


88 


Tables  and  Chaets 


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Tables  and  Charts 


91 


INSTRUCTIONS 
FOR  USE  OF  TABLES  2  AND  3  FOR  TAX  ON  INDIVIDUAL  INCOME 

EXAMPLE: 

A  married  man  without  dependents  has  a  net  income, 

all  subject  to  Normal  and  Surtax '  $51  000 

From  the  column  of  total  tax,  with  exemption  of  $2,000 
we  find  the  tax  for  $50,000  to  be $9,190 

The  next  higher  Surtax  rate  is 24% 

Add  Normal  Tax  rate 8% 

32% 
The  additional  $1,000  at  32% 320 


« 


Total  tax ^9  51Q 

If  the  tax  be  calculated  in  detail,  we  have: 
Total  net  income 


Less  exemption * «* 


$51,000 
000 


Amount  of  income  subject  to  Normal  Tax. . .       $49  000 

$  4,000  at  4% $1  fin        ' 

$45,000  at  8% '...'.'.', V.\V. .[',.'.      3600 


Normal  Tax 


$3,760 


From  Surtax  table,  we  find  tax  on  $50,000  to  be. .  $5  510 


Total  tax, 


$9,510 


The  Normal  Tax  and  Surtax  tables  may  be  taken  separately, 
or  m  any  combination  desired. 

The  method  is  the  same  for  the  1922  table. 


"V- 


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TABLE  V 


Table  Showing  Total  Income  Taxes  of  Corporations  for  1922  on 

Various  Net  Incomes 

io^^^^  |25,000  of  Taxable  Income,  Percentage  of  Tax  to  Income  is 
l/J%7o.    Percentage  varies  from  7^^%  on  $6,000  to  11^%  on  $25,000.) 


Net  Income 


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$2,000 
6.000 
10.000 
15.000 
20,000 
25.000 


25,286.71* 
30,000 
40.00) 
50.000 
60.000 
70,000 


80.000 
100.000 
110.000 
120.000 
130,000 
140.000 


150,000 
160.000 
170,000 
180,000 
190,000 
200,000 


225,000 
250,000 
275,000 
300.000 
325.000 
350.000 


376,000 

400,000 
425.000 
450.000 


Total  Tax 


None 

'  ;    $375 

11.000 

.1,625 

2.250 

^2.875 


3,160.71 

3,750 

5,000 

6,250 

7,600 

8,760 


10,000 
12,500 
13,750 
15,000 
16.250 
17.500 


18,750 
20,000 
21,250 
22.500 
23,750 
25.000 


28,125 
31.250 
34,375 
37.500 
40.625 
43.750 


46,875 
50,000 
53.125 

56.250 


Net  Income 


475,000 
500,000 


1,400,000 
1,500,000 
1,600,000 


1.700,000 
1.800.000 
1.900,000 
2,000,000 
3,000,000 
4,000,000 


5,000,000 
6,000,000 
7,000.000 
8,000.000 
9.000,000 
10,000.000 


15.000,000 
25,000,000 
50,000,000 


Total  Tax 


59,375 
62,500 


'                650,000 

68,750 

600,000 

75,000 

r50,000 

81.250 

^700,000 

87.500 

750.000 

93.750 

800,000 

100,000 

850,000 

106.250 

900,000 

112.500 

950.000 

118.760 

1,000,000 

125.000 

1,100,000 

137.500 

1,200,000 

150,000 

1,300,000 

162,500 

175,000 
187,500 
200,000 


212,500 
225,000 
237,500 
250.000 
375,000 
50), 000 


625.000 

750.000 

875.000 

1,000,000 

1,125,000 

1,250,000 


1.875,000 
3,125,000 
6,250,000 


•Thii  amount  of  income  is  the  dividing  line  for  the  use  of  the  $2,000  exemption. 
Incomes  in  excess  of  $25,285.71  have  no  specific  exemption  of  $2,000. 


96 


Tables  and  Charts 


TABLE  VI 

Individual  Tax  Rates  Under  the  Several  Income  Tax  Laws 
The  first  Income  Tax  Law  was  passed  October  3,  1913.  There 
have  ibeen  four  Income  Tax  Laws  since  enacted.  These  have  been 
supplemented  from  time  to  time  by  Acts  levying  various  kinds  and 
forms  of  tax.  The  outstanding  indication  is  that  taxation  of  income 
is  to  be  a  permanent  feature  of  Federal  revenue.  The  several  Income 
Tax  Acts  and  their  rates  are  as  follows: 

INDIVIDUAL, 


Act 


First 
Second 
Third 
Fourth 

Fifth 


Passed 


Oct.     3,  1913  X 
Sept.  8,  1916  fx) 
Oct.     3,  1917  * 
Feb.  24,  1919  (a) 

(Act  1918) 
Nov.23,  1921  (b) 


Normal 
Tax 


2% 
4%  (2%  on  first  $2,000  above  exemption) 
112%  (6%  on  first  S4,000  above  exemption)  Ifor      1918 
I  8%  (4%  on  first  »J  .000  above  exemption)  /after  1918 
8%  (4%  on  first  $4  .000  above  exemption) 


X  Effective  March  1,  1913. 
(X)  EfEective  Jan.  1,  1916. 
•Effective  Jan.   1,  1917. 


(a)  Effective  Jan.  1,  1911 

(b)  Effective  Jan.  1,  1921. 


The  rates  of  surtax  and  the  years  for  which  effective,  are  shown  in 
tables  below.  The  surtax  rates  of  the  Act  of  1918  and  for  1921  are 
identical — See  Table  II.  The  surtax  rates  for  1922  are  shown  in 
Table  III. 

SURTAXES  FOR  1913,  1914.  AND  1915 

Rates 

$50,000 1% 

75,000 2 

100,000 3 

250.000 4 

500,000 5 


$20,000 

50,000 

75,000 
100,000 
250,000 
Above  $500,000,  6  per  cent 


to 

to 
to 
to 
to 


SURTAXES  FOR  1916 


$20,000 

40,000 

60,000 

80.000 

100,000 

150,000 


to 
to 
to 
to 
to 
to 


$40,000 1% 

60,000 2 

80,000 3 

100,000 4 

150,000 5 

200,000 6 


Above  $2,000,000,  13  per  cent 


200  OltO  to      250,000 7% 

250.000  to       300,000 8 

300.000  to       500,000 9 

500,000  to  1,000,000 10 

1.000  OOO  to  1,500,000 11 

1,500.000  to  2.000,000 12 


SURTAX  FOR  1917 


$5,000  to     $7,500 1% 

7,500  to     10,000 2 

10,000  to  12,500 3 

12,500  to  15,000 4 

15,000  to  20,000 5 

20,000  to  40,000 8 

40.000  to  60.000 12 

60,000  to  80,000 17 

80,000  to  100,000 22 


100,000 
150.000 
200,000 
250,000 
300,000 
500.000 
750,000 
1,000,000 
1,500,000 


to 
to 
to 
to 
to 
to 
to 
to 
to 


150,000 27% 

200,000 31 

250,000 37 

300,000 42 

500,000 46 

750,000 50 

1,000,000 55 

1,500,000 61 

2,000,000 62 


Tables  and  Chakts 


97 


TABLE  VII 

Corporation   Tax    Rates    Under   Several    Income    Tax    Laws 

INCOME  TAX 


Act 


First 

Second 

Third 

Fourth 

Fifth 

Sixth 


Pa.ssed 


Aug. 
Oct. 

Oct. 
Feb. 


5,  1909 
3, 1913 
8.  1916 
3,  1917 
21.  1019 


Exemption 


fAct  1918) 
Nov.    2.3,  1921 


$.5,000 
None 
None 
None 

$2,000 

$2,000  for 

Incornos  not 

over  $25,000. 


EfFeotive 


Jan. 

Mar. 

Jan. 

Jan. 

Jan. 


1909 
1913 
1916 
1917 
1918 


Jan.   1,  1921 


Rate 


1% 
1% 
2% 
6% 


—1918 
after  1918 


/12%- 
110% 

/ 10%— 1921 
1 12}^%— 1922 
and  thereafter 


Credit 


■I 


Amount  of  Ex- 
cess Profits  Tax 
or  War  Profits 
Tax;  (Liberty 
Bond  IntereBt 
and  Dividends 
included  in  tax- 
able income  on 
return.)  Under 
Acts  1917. 
1918,    1921. 


EXCESS  PROFITS  TAX,  1917 

Required  computation  of  average  Invested  Capital  and  Income  for 

Pre-War  Period   (1911  to  1913,  inclusive)   and  for  1917 
Excess  Profits  Credit  against  net  taxable  income: 


not  under 
"7% 


and 


not  over 


(of  Average  Invested  Capital  for  1917), 
Plus  $3,000 


COMPUTATION 


Bracket 


Ist.  not  over  1-5%  of  Capital 
2nd,  not  over  5%  of  Capital 
3rd,  not  over  5%  of  Capital 
4th,  not  over  8%  of  Capital  ■■ 
oth.  Balance  of  Income. . .  .  ■■ 


Income 


Net  Income 

Credit  Excess  Profits  Tax 
Balance 


S 
$ 

s 

$ 
$ 
$ 


Credit 


$ 

S. 

s. 

$. 
$. 


Dif- 
ference 
Taxable 


$. 

9. 
$. 
S. 


Kate 


20% 
25% 
35% 
45% 
60% 


Tax 


S. 
f. 
$. 
S. 
$. 


* * $  Excess  Profits  Tax 

®S%fo'" f  Income  Tax 

Total  Tax  =S 


Over  $2,000,000,  63  per  cent. 


Prior  to  1917,  dividends  were  subject  to  income  tax.  Occasion- 
ally  cases  were  met  with  where  it  was  necessary  to  modify  the  fore- 
going formula  so  as  not  to  assess  more  than  1%  on  dividends  for  yeai^ 
prior  to  1916,  or  2%  for  1916. 


i 

J 


Tables  and  Charts 


TABLE  Vll— Continued 

COMPUTATION 
1918 


Bracket 


Ist,  not  over  20%  of 

Capital 

2nd,  Balance 


Net  Income. 


Income 

Credit 

Difference 
Taxable 

Rate 

$ 

$ 

$ 

30% 
65% 

$ 

$ 

$ 

Tax 


Less  War  Profits 
Credit 


$  Excess  Profits  Tax 


Balance  Taxable =  $ @  80% 

Compare  Maximum  Tax  (Sec.  302)  $. . 


=  $  War  Profits  Tax 


AFTER  1918 


Bracket 

Income 

Credit 

Difference 
Taxable 

Rate 

Excess  Profits 
Tax 

l8t,  not  over  20%  of 

Capital 

2nd,  Balance 

•- 

$ 

$ 

$ 

20% 
40% 

$ 

Net  Income 

. .  * 

$ 

1 

$ 

$ 

$Tax 

In  both  cases  the  applicable  war  tax  is  deducted  from  net  income 
before  computing  income  tax. 

While  taxation  for  1917  was  under  both  the  Acts— 1916  and  1917 
— the  combination  of  the  two  gave,  generally,  the  formula  for  in- 
come tax  used  above. 

Excess  Profits  and  War  Profits  Tax— Act  1918 
For  1918 — Required  computation  of  average  pre-war   (1911-1913,  in- 
clusive) Invested  Capital  and  Net  Income,  and  for  taxable  year. 
Excess  Profits  Credit:  8%  of  Invested  Capital,  +  $3,000. 
War  Profits  Credit:  »  n-  'p  , 

(a)  Average  Pre-war  Net  Income,  plus  or  minus  10% 
of  difference  between  average  Pre-war  Invested 
Capital  and  average  Invested  Capital  for  taxable 
year. 

(b)  But  this  credit  could  not  be  less  than  10%  of  In- 
vested Capital  for  taxable  year  plus  $3,000. 

Excess  Profits  Tax  Rates  for  1918:  j?2T?  ^l  ^^^*  bracket, 

(65%  of  second  bracket. 

War  Profits  tax  rate:  80%  of  net  income  in  excess  of  War 
Profits  Credit. 

The  higher  of  the  two  taxes  was  assessed,  unless  the  maxi- 
mum tax  under  Section  302  was  lower,  in  which  ev#nt 
the  maximum  tax  was  assessed. 


Tables  and  Charts 


99 


TABLE  Vni 


Showing  Effect  of  High  Taxes 

Table  A—Table  showing  decline  of  incomes  over  $300,000— Individual. 
(Reported  shrinkage  due  to  excessive  surtaxes.) 


Number  of  returns 

Net  Income 

Income  from  dividends 
interest,  and  investments 

All 

Classes 

Incomes 

over 
$300,000 

All 
Classes 

Incomes 

over 
$300,000 

au 

Classes 

Incomes 

over 
$300,000 

1916 
1917 
1918 
1919 

437,036 
3,472,890 
4,425,114 
5,332,760 

1,296 

1,015 

627 

679 

$6,298,577,620 
13,652,383,207 
15,924,639,355 
19,859,491,448 

$992,972,986 
731,372,153 
401,107.868 
440.011.589 

$3,217,348,030 
3,785,557,955 
3,872,234,935 
3,954,553,925 

$706,945,738 
616,119,892 
344.111,461 
314,984,884 

Table  B— Table  showing  average  rate  of  excess-profits  and  income 
taxes,  upon  corporations  of  different  size,  illustrating  difference  in 
effect  of  the  tax  upon  small  or  moderately  capitalized  and  large 
corporations. 

[Average  size  of  corporations  (measured  by  invested  capital)   earn- 
mg  different  rates  of  profit;  corporation  returns  made  in  1919.] 


Per  cent  of  Net  Income 
to  Invested  Capital 


Less  than  5  per  cent . . 

5  to  10  per  cent 

10  to  15  per  cent 

15  to  20  per  cent 

20  to  25  per  cent 

25  to  30  per  cent 

30  to  40  per  cent 

40  to  50  per  cent 

50  to  75  per  cent 

75  to  100  per  cent 

100  per  cent,  and  over 

Total... 


Number 

of  coTpo- 

rations. 


Invested 
Capital 


10,689 

21,869 

22,684 

17,388 

11,987 

7,743 

9,050 

4,807 

4,911 

1,734 

2,194 


115.056 


$14,104 

15,925 

8,962 

5,482 

3,251 

3,785 

2,421 

1,232 

784 

205 

133 


,248,246 
.632,944 
,689.034 
,627.463 
,948,260 
,581,785 
.285,621 
.173,122 
,254,745 
.744,478 
.853,470 


$56.290,039.168 


Per  cent  of 

Average 

Income  and 

Invested 

Profits  Tax 

Capital 

to  Net  In- 

come 

$1,319,511 

10.99 

728,229 

11.93 

395,111 

21.60 

315,311 

33.99 

271,290 

41.51 

488,904 

51.22 

267,545 

53.38 

256.329 

57.58 

159,693 

62.30 

118,653 

64.24 

61,009 

67.40 

$489,240 


|i 


. 


37.  S6 


I 


M 


m^^^m 


€tab!iiitd 


Committee  of ' 
'Dtieciors  en  Investment 
of  Trust  Funds 

Joseph  P.  Grace 

James  H.  Post 

Percx  A.  Rockefeller 


i^rovisionfor  the  future 

IN  order-to  be  certain  that  your  estate 
w  ill  be  distributed  in  accordance  with 
your  desires  there  are  certain  legal  steps 
which  must  be  taken. 


Hv  availing  yourself  of  the  services  of 
the  Trust  Department  of  The  National 
City  Hank  you  are  assured  that  your  estate 
will  not  only  be  distributed  in  accord- 
ance with  your  wishes  but  that  your 
property  will  be  carefully  conserved. 

If  you  cannot  visit  the  Trust  Depart- 
ment at  the  Head  Office,  55  Wall  Street, 
or  the  branch  office,  42nd  Street  at 
Madison  Avenue,  we  suggest  that  you 
write  for  our  book  "Conserving  Your 
Property",  which  will  answer  many 
questions  of  great  importance  to  you. 

The  Trust  Department  invites  corres- 
pondence directly  with  individuals  or 
through  their  attorneys. 


THE  NATIONAL  CITY  BANK 

OF  NEW  YORK 

C^pUaly  Surplus  and  Undivided  Trqfits  more  than  $100,000,000 


Head  Office^  55  Wall  Street 
Uptown  Branchy  42ND  Street  at  Madison  Avenue 


Date  Due 


I}.A90..Z 

Nat i  onal  City  Eank 

Digest    o''  th^    Fed^^r-"! 
?-e\^'i.ue  act   of   1921 


IZl 


This  book  must  be  returned  to  the 
desk  at  which  it  was  borrowed  before  10 
o'clock  A.  M.  the  next  day,  unless  special 
arrangement  is  made.  If  this  book  is 
not  returned  by  that  hour,  a  fine  of  25 
cents  a  day  will  be  incurred. 


-^o*  "7 


s-Zi ^..■/'^^^^H 


^-^ 


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WAY  1  9  19/u 


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END  OF 
TITLE 


